The arbitration agreement is an agreement of the parties to a contract to submit their future disputes to the decision of an arbitral tribunal and it serves three functions: (i) it is an evidence of the consent of the parties to arbitrate, (ii) it establishes the jurisdiction of the arbitral tribunal and (iii) lays out the procedure for the arbitration.
As mentioned in a previous post, the most common place to find an arbitration agreement is as a clause in a contract where the parties agree to submit to arbitration the future disputes that may arise out of the contract.
The majority of arbitration procedures are managed by institutions that provide dispute resolutions services. These institutions usually suggest model arbitration agreement clauses to be sure that all the requirements for the validity of the clause are met. Though the parties are free to draft the arbitration agreement, if they are willing to submit their disputes to the proceedings of one of those institutions it will be safe to use their sample model clauses.
The International Chamber of Commerce (ICC) provides a sample arbitration clause in its Arbitration rules (2021):
'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.'
ICC advises that the clause should be adapted by the parties to agree on the number of arbitrators, the place, the language and the law applicable to the merits.
The London International Arbitration Court (LCIA) recommends the following clause:
'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 seat, or 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 [ ].'
And the Madrid International Arbitration Center (CIAM in Spanish) recommends this clause:
'Any dispute arising from this contract or which relates to it, including any question relating to its existence, validity, interpretation, performance or termination, shall be subject to the decision of [one arbitrator / three arbitrators], with the administration of the arbitration to be referred to the Madrid International Arbitration Center, in accordance with its Bylaws and Rules in force at the date when the request for arbitration is filed. The arbitration shall be in law. The language of the arbitration shall be [specify language]. The place of arbitration shall be [city].'
Other sample model clauses can be found in the Rules of Arbitration of other arbitral institutions.
Consent for Arbitration
Consent is the basis of arbitration. It has been said that it is “the cornerstone of arbitration”. There is no arbitration if the parties have not consented to it and, once the consent is given, the agreement is binding and one party cannot revoke it. It is usually included as a clause in a contract.
One important characteristic of the arbitration agreement is that it is a different contract distinct from the contract in which the clause is contained. This is called the separability of the arbitration agreement which means that it is an autonomous contract, it is a contract in itself.
The purpose of the doctrine of separability is to protect the arbitration agreement because if the contract in which it is contained is annulled, the arbitration agreement may survive because it may be governed by a law different from that governing the main contract.
Validity of the arbitration agreement
The validity of an arbitration agreement depends on the law applicable to it and we can say that, as in many agreements, it is subject to formal and substantive requirements.
The formal requirement is established in the New York Convention which applies to the recognition and enforcement of foreign arbitral awards. Whilst the Convention does not impose any substantive requirement for its validity, it demands a formal requirement: that the arbitration agreement be in writing.
This writing requirement is interpreted very broadly. The New York Convention says that “agreement in writing” includes a clause in a contract or an arbitration agreement signed by the parties or contained in an exchange of letters or telegrams.
The law applicable to the arbitration agreement will determine its formal validity, i.e., it will establish whether there has been an agreement in writing or not. Different national laws provide different perspectives but all them have in common that the requirement is very lenient.
Under the English Arbitration act (1996) the writing requirement is satisfied if there is evidence in writing which means, for example, that the agreement can be recorded by one party or by a third party.
The UNCITRAL Model Law (2006) recognizes data messages which include information generated or stored in electronic, magnetic, optical or similar means.
The Spanish Arbitration Act (2003) accepts an arbitration agreement if its existence is affirmed by the claimant in the memorandum of claim and the respondent does not deny it.
The substantive validity of the arbitration agreement includes the capacity and the consent.
Capacity is the ability of a party to enter into the arbitration agreement. This is a question to be determined by a national law because in general, lack of capacity determines the invalidity of the arbitration agreement. And the applicable law must be the personal law of each party. The New York Convention states that recognition and enforcement of an award may be refused if the parties were under some incapacity under the law applicable to them.
Consent to arbitrate is the basis of arbitration, as stated before, and national laws will determine whether a party consented or not to the agreement or if that party acted by mistake, fraud, or was under an impossibility to consent, etc. Similarly, the New York Convention allows to refuse recognition and enforcement of an award if the agreement is not valid under the law to which the parties have consented or under the law of the seat of arbitration.
Which is the governing law of an arbitration agreement?
It is very uncommon to find in an arbitration agreement a mention the law that is applicable to it. Drafters of arbitration clauses usually focus on the arbitral institution, the number of arbitrators or the language of the proceedings but they hardly ever think of including the law applicable to them.
This is important because one party may bring an allegation of invalidity of the arbitration agreement or lack of capacity of the other party.
As we said before, the arbitration agreement is a distinct contract from the contract in which it is contained and one cannot assume that both agreements will be regulated by the same law.
While a national court, when making o decision on this issue, will always apply the local law or its private international rules (conflicts of law rules), an arbitral tribunal is not bound by any specific rules of private international law and may choose other conflict of law rules to decide which is the applicable law or may apply the law of the seat.
The New York Convention, as previously mentioned, provides that an award may not be enforced if the arbitration agreement is not valid under the law of seat, absent an agreement of the parties regarding the applicable law.
A national court, when applying the local law may find that the applicable law to the arbitration agreement may be either the same law applicable to the contract, or the law of the seat or the local law of any of the parties if, for example, a question of capacity is raised.
The answer to this question is not pacific depending of the legal system.
Under English Law:
In the Sulamerica[1]case, the English Court of Appeal took a pro-validation approach finding that, when two different laws could apply and applying one of them would render the arbitration agreement invalid, then the other law should be applied.
In the Enka[2] case, a later case, the UK Supreme Court ruled that, absent an agreement of the parties on the applicable law to the arbitration agreement, the choice would be the law with which the arbitration agreement is more closely connected. In making that choice, one important factor to consider is the law applicable to the contract but other factors may be taken into account such as if the selected law would make the arbitration agreement ineffective or the fact that the parties chose a certain place as the seat of arbitration as a neutral forum for the arbitration.
French courts have taken a different approach. In the Dalico[3] case the French Cour de Cassation held that the existence and validity of the arbitration agreement depends only on the common intention of the parties without the need to refer to any national law.
The Spanish Arbitration Act (2003) provides that the validity of the arbitration agreement will be determined, absent the agreement of the parties, by the law applicable to the contract or by Spanish law.
As we have seen, the arbitration agreement is the origin of arbitration and it is important to include in its wording its applicable law to avoid problems of validity.
In the next post we will examine in more detail how to draft a valid arbitration agreement.
_____________________________________________________________________________ [1] Sulamerica CIA Nacional de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638 [2] Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 [3] Dalico Contractors v Municipalité de Khoms El Mergeb, Judgement of the Court de Cassation 91-16.828, 20 Dec 1993
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