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Midnight Arbitration Clause v. 8:00 a.m. Clause

January 2016 - Litigation & Dispute Resolution. Legal Developments by Motei & Associates.

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By: Ashraf El Motei LL.M., MCIArb

In the past, contractual dispute resolution provisions were commonly known as ‘midnight’ clauses because commercial lawyers only come to discuss them in the closing stages of contract negotiations. Nowadays, taking into account the complications which may arise from badly drafted arbitration clause, they are better referred to as the 8 o’clock in the morning clauses.

There is no such thing as a single ‘model’ or ‘all purposes’ clause appropriate for all occasions. Each clause should be carefully tailored to the requirements of a given situation, taking into account the likely types of disputes, the nature/ needs of the parties’ relationship and the applicable laws.

Certainly a badly drafted arbitration clause leads to disputes and wasted time and costs.

This article covers some of the main points which the parties need to consider when drafting an arbitration clause at a main contract stage or in a separate document (‘arbitration agreement’ or ‘compromis’) whereby the parties consent to submit their dispute that has already arisen to arbitration – which in practice is almost impossible to happen after the relations break down.

I.       Institutional (administered) or ad hoc

1.      Institutional (administered) Arbitration. The parties should consider whether they want their arbitration to be administered and supervised by a recognized arbitral institution (e.g. International Chamber of Commerce (ICC), Singapore International Arbitration Centre (SIAC), London Court of International Arbitration (LCIA), Arbitration Institute of the Stockholm Chamber of Commerce (SCC), Dubai International Arbitration Centre (DIAC)) or whether they want an ad hoc procedure.

The rules of an arbitration institution usually organize the arbitration process such as selecting and replacing of arbitrators, organizing hearings and handling communications between the parties and the arbitrators, set the arbitration costs and arbitrators’ fee, enforce procedural deadlines and review the arbitral awards.

2.      Ad hoc Arbitration. Under an ad hoc procedure, the parties can still use a set of institutional rules or agree their own rules and procedures, but this requires a spirit of cooperation between the parties and an efficient arbitrator. Certainly, arbitration costs could be a real challenge.

3.      Ambiguity/ Reference to non-existing Institution. It is extremely crucial that the parties select a clear and unambiguous language in establishing the arbitral procedures they wish, and specifically the clear reference to an existing arbitral institution.

Below are examples on ambiguous and incorrect references to arbitral institution.

Ambiguity: â€˜Any dispute arising from or relating to this Contract will be settled under the Rules of Arbitration of the International Arbitral Centre of the Chamber of Commerce and Industry in Paris.’ Would this be the CMAP (Centre for Mediation and Arbitration of Paris founded by the Chamber of Commerce and Industry) or ICC (International Chamber of Commerce)?

Reference to non-existing Institution‘Any dispute arising from or relating to this Contract will be settled under the rules of procedure of the International Commercial Arbitration Association.’

II.      Scope of the Arbitration Clause

4.      The wording must have a broad scope. Each of the leading arbitral organizations provides a sample arbitration clause for inclusion in international contracts. For example, the International Chamber of Commerce (ICC) suggests the following clause:

‘All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.’

This clause has been said to contain the three ‘key expressions’ for an arbitral clause – “All disputes”. . . “in connection with”. . . “finally settled”. The term “all disputes” encompasses all types of controversies, without exception. The language, “in connection with”, creates a broad form clause that will cover non-contractual claims such as tort and fraud.

The London Court of International Arbitration’s (LCIA) suggested clause states: â€˜Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.

The number of arbitrators shall be [one/three].

The legal place of arbitration shall be [City and/or Country].

The language to be used in the arbitral proceedings shall be [_____].

The governing law of the contract shall be the substantive law of [_____].’

5.      Reference to arbitration must be clear and the word ‘arbitration’ must be mentioned. In AIG Europe v. QBE International Insurance (2001), the English court had to interpret the following clause headed ‘Arbitral Procedure’: 

‘In case of dispute between the insured and the insurers the parties will apply to the tribunal de Commerce in Paris who will appoint an arbitrator. The latter, with the possible collaboration of two further arbitrators appointed by the parties, will have the task of proposing an agreement acceptable to both parties.’

The court held that although the clause referred to the appointment of one or more arbitrators, their duty was merely to act as conciliators proposing an agreement and there was no arbitration agreement.

III.     Number of Arbitrators  

6.      One or Three (odd number). It is advisable that an arbitration clause to specify the number of the arbitrators which should be either one or three arbitrators (even number will risk deadlock).  

The Parties should consider whether the value of the contract of any potential disputes justifies the selection of three arbitrators which will be more expensive and normally longer (coordinating space in three arbitrators' diaries will take more time).

However, the parties may agree not to specify the number in advance and to decide in accordance with the size and complexity of the dispute if one arises. The disadvantage of this is that proceedings may be delayed if the parties disagree on the number of arbitrators once relations have broken down. If institutional arbitration is used, the institution will decide the number of arbitrators.

7.      Excessive Requirements as to Arbitrator qualifications‘All disputes arising out of this Contract shall be decided by one Arbitrator. The Arbitrator shall be a Romanian national who is  fluent in English and Spanish with a degree in mechanical engineering, substantial experience as an international arbitrator, and at least 15 years of experience as a CEO of an international energy company.’

Although this clause may sound to drafters the best ever clause to select the suitable arbitrator in the event of a dispute, but when you set this into motion, probably you will run into a serious problem to find arbitrators who are matching the requirements.

8.      Default mechanism if the parties fail to agree (i.e. multiple parties’ contracts). It is useful to include the default mechanism which will apply if the parties fail to agree. For example, if the parties are to agree on a sole arbitrator you should consider adding a provision that if they cannot agree within a defined timescale the relevant institution or a third party will appoint the arbitrator.

If the parties agree to have a tribunal of three arbitrators, the usual process is for each side to nominate an arbitrator and for those two arbitrators then to nominate a presiding arbitrator. In the case of an institutional arbitration, the selected institution may nominate the presiding arbitrator.

In any event, most institutional rules provide default mechanisms for selecting and replacing arbitrators. Depending on the rules used, if any, the parties will have greater or lesser influence in the selection process.

Some thought needs to be given when there are more than two parties to the contract - for example, in relation to the mechanism for nominating arbitrators. In this case the clause may provide that if a dispute arises and more than two of the parties are in dispute, then one arbitrator may be chosen by the party or parties making the claim and one arbitrator by the party or parties on the other side. The presiding arbitrator can then be chosen by these two arbitrators in the usual way.

IV.     Seat of Arbitration

9.      Seat will determine procedural rules. The clause should specify the seat, or place, of the arbitration. The seat of the arbitration will determine the procedural rules which will govern the arbitration process. For example, if the seat is Paris then aspects such as ‘without prejudice’ and ‘disclosure’ will be governed by civil law principles and may be different from the position in a common law jurisdiction such as England.

10.    Consider how supportive of the arbitration process the national courts are. When thinking about what seat to choose, you may need to consider how supportive of the arbitration process the national courts at the seat are.

11.    Seat of arbitration doesn’t dictate the location of the hearings.However, it must be noted that the seat of arbitration does not dictate the physical location of the arbitration hearings. Hearings often take place at the seat of the arbitration but this is not always the case.

12.    Seat of the arbitration is crucial when enforcing under NY Convention. You may also need to consider enforcement and whether the seat is in a country that is party to the New York Convention. Bear in mind that the New York Convention enforces awards by reference to the seat of arbitration, not the country that the parties are from. 

For example, Yemen is not signatory to the NY convention so an arbitration award made in Yemen will not be enforced under the NY convention, but a Yemeni company can enforce an award under the NY Convention if the seat is in county signatory to the NY convention.

V.      Language and Confidentiality

13.    Saving on translation’s costs. Specifying the language that will be used up front may save a considerable amount in translators' fees. If the language is not specified, the arbitrators get to choose. The result may not be what you would expect.

14.    If confidentiality is important, you should consider including an express obligation of confidentiality. English law recognizes that it is an implied term of arbitration agreements that the proceedings are private and confidential. But this is not the case in other jurisdictions.

To keep the arbitration and all materials generated for the purpose of the arbitration confidential in the arbitration clause. You may not need to do this in all cases, as some of the institutional rules already provide for confidentiality.

VI.     Governing Law of the Arbitration Procedures

15.    Governing Law of the contract (‘Substantive Law’). This is the law governing the subject of the dispute, sometimes termed the ‘substantive law’ or the ‘law of the main contract’. The parties should decide on the law they wish to apply to any disputes that arise and the tribunal will apply that law to the merits of the dispute.

If this is not specified, it may be a source of substantial dispute in itself further down the line if relations between the parties sour.

16.    Governing Law of the Arbitration Procedures (‘lex arbitri’). Usually, but not necessarily, this will be the same as the substantive law of the contract. Often the arbitration agreement will consist of a clause or clauses within the substantive contract, and will be governed by the law specified within that contract. However, it may be that a different law is specified as the law governing of the arbitration procedures.

In cross borders disputes, a conflict often arises as to which law applies; the law of the place where the dispute or contract arose; the law of the defendant's domicile; or the law in respect to the location of the item in dispute (‘lex situs’).

VII.    Signing Arbitration Clause

17.    Signatories have the capacity to enter into arbitration agreements. You shall need to check that the person signing the arbitration agreement – which, in many cases, will be the main contract containing the arbitration clause within it – has authority to enter into arbitration agreements. Bear in mind that in some jurisdictions a special power of attorney will be needed.

18.    Mandatory Rules. Mandatory rules are rules that cannot be contracted out of. Any applicable institutional rules can only amend or override non-mandatory rules. An example of a mandatory rule is that in Turkey it is mandatory that anyone signing an arbitration agreement on behalf of someone who is Turkish must have a special power of attorney.

In Dubai, if the Government of Dubai or its departments and corporations are party to a contract, the arbitration must take place in Dubai and must be governed by Dubai procedures and laws unless an exception has been granted by the Ruler of Dubai.

19.    Enforcement may be refused under NY Convention. One of the few grounds in the New York Convention for refusing to enforce an arbitration award exists when the parties to the arbitration agreement are under some incapacity (pursuant to the law applicable to them) or when the arbitration agreement is invalid.

About the Author

Ashraf El Motei heads the Dispute Resolution Practice inMotei & Associates. He specializes in civil and commercial litigation and has particular focus on international arbitration. His practice encompasses a broad spectrum of substantive areas with specific focus on all types of real estate disputes including sale and purchase disputes, distressed/ canceled developments, enforcement of judgments and security, employment, professional negligence and health care disputes.

In addition to his civil litigation practice, Ashraf has represented clients in numerous arbitration cases under the rules of the International Chamber of Commerce (ICC) and the Dubai International Arbitration Centre (DIAC). He has also served as arbitrator and co-arbitrator in several significant arbitrations. He has specific expertise in enforcement of foreign arbitral awards under the New York Convention.

For further info about this article, please feel free to contact Mr. El Motei at: a.motei@motei.com