Arbitration clause: a private, binding decision instead of a court

Sample clause

a distribution agreement between Yellowbox Irrigation, a fictional Australian manufacturer of drip irrigation controllers, and Paddyfield Agritech, a distributor based in Singapore selling into South East Asia

31. Arbitration 31.1 Any dispute, controversy or claim arising out of, relating to or in connection with this Agreement, including any question about its existence, validity or termination, must be resolved by arbitration administered by the Australian Centre for International Commercial Arbitration under the ACICA Arbitration Rules in force at the date the arbitration starts. 31.2 The seat of arbitration is Sydney, Australia. 31.3 The tribunal consists of one arbitrator. 31.4 The language of the arbitration is English. 31.5 The award is final and binding on the parties, and judgment on it may be entered in any court having jurisdiction. 31.6 Nothing in this clause prevents a party from seeking urgent interim relief from a court of competent jurisdiction. 31.7 This clause is governed by the laws in force in New South Wales.

Sample wording, not legal advice.

Variants

What to negotiate

• The seat

  The seat is the legal home of the arbitration. Its courts supervise the process and hear any challenge to the award, and its arbitration law fills gaps. Parties choose a seat with a supportive arbitration law and courts, often a neutral one where neither party is based. Sydney, Melbourne, Singapore and London are common choices in Asia Pacific deals.

• Cost against appeal rights

  Arbitration can cost more than litigation for smaller claims because the parties pay the arbitrators and the venue. In exchange it usually offers very limited grounds to set aside an award. Parties with modest likely claims prefer a single arbitrator, expedited procedures, or court for claims below a threshold.

• Confidentiality

  Arbitration is private, but privacy and confidentiality are not the same. Under the International Arbitration Act 1974, confidentiality provisions apply unless the parties opt out in writing. Other laws and rules differ, so a party that needs the existence and outcome of a dispute kept secret should say so expressly in the clause.

The risk of leaving it out

Without an arbitration clause disputes go to court, which is public and national. For a purely domestic contract that may be fine. For a cross border contract, a court judgment may be hard to enforce where the other party's assets are, whereas an arbitral award can be enforced in the many countries that are party to the New York Convention.

The law behind an Australian seat

For international commercial arbitration seated in Australia, the International Arbitration Act 1974 gives the UNCITRAL Model Law on International Commercial Arbitration the force of law, and where the Model Law applies, state arbitration laws do not. Domestic arbitrations are governed by each state's commercial arbitration act, which is also based on the Model Law. The Act also gives effect to the New York Convention, so a foreign award can be enforced in an Australian court as if it were a judgment, with enforcement refused only on limited grounds such as incapacity, invalidity of the arbitration agreement or lack of proper notice.

Clauses that cause trouble

The recurring problems are easy to avoid. A clause naming an institution that does not exist, or rules the named institution does not administer, invites a court application before the dispute even starts. A clause that says disputes may be referred to arbitration can be read as optional. A contract with an arbitration clause and a separate exclusive court jurisdiction clause, neither subject to the other, creates a conflict that has to be litigated. And a multi tier clause that leads into arbitration needs clear deadlines, otherwise a party can argue arbitration was started too early.

Where it sits in a generated document

An arbitration clause normally replaces or overrides the jurisdiction clause in the general provisions. A generated agreement numbers each clause and sub clause, so seat, rules, tribunal size and language can each be stated as a separate sub clause, which makes gaps easy to spot. Institution and rule names come from the description and nothing is cited, so the exact names need confirming with the institution before the agreement is signed.

Documents that carry this clause

Distribution agreement template with territory and targetsAn exclusive distribution agreement is a trade: a territory in exchange for volume. This one appoints a New Zealand distributor for a skincare range at 48 per cent of recommended retail, with purchase targets rising from NZD 240,000 to NZD 420,000 across three years, and exclusivity that converts to non exclusive if a target is missed by more than 15 per cent.Master services agreementA data consultancy and an insurer sign this once and then buy work under it for three years. It is the rare contract whose whole purpose is to make the next twenty contracts short.Joint venture agreement template with contributions and splitAn unincorporated joint venture has no company to fall back on, so everything a company structure would supply has to be written down. This one puts two builders together for a single $14.6 million refurbishment, splits it 55/45, and sets out who funds it, who decides, how a deadlock breaks and how either of them gets out.

Questions people ask