How to Draft Valid Arbitration Agreements: Essential Provisions

Arbitral proceedings are expressions of the will of the parties of which party autonomy is consciously guarded. The existence of an arbitration agreement is essential as it indicates the parties’ consent to settle their dispute by arbitration.

The Arbitration and Conciliation Act (ACA) gives no express definition to the term “Arbitration Agreement” but it describes the form of the agreement which is why parties must take extra precautions when executing an arbitration agreement (either as a standalone agreement or as part of another commercial agreement).

By virtue of Section 1(2) of the ACA, an Arbitration Agreement must be in writing and contained in a document signed by the parties or in an exchange of letters, telex, telegram, or other means of communication which provide a record of the arbitration agreement, or in any other documents in which the existence of an arbitration agreement is alleged by one party and not denied by another.

Therefore, the way and manner an arbitration agreement/clause is drafted Are very crucial to the commercial relationship between the parties. It is pertinent to note that Arbitral Tribunals have been advised to refuse to conduct arbitration proceedings where the Arbitral Clause is ambiguous.

When drafting Arbitration clauses, both the drafters and the parties are advised to state their intent in clear terms devoid of ambiguity and obscurity. To draft a valid Arbitration clause/agreement, the parties must first agree on the following fundamental terms:

1. Scope of the Arbitration Agreement:

Parties must agree on the types of disputes that can be referred to arbitration under the agreement. A poorly drafted scope may deprive the tribunal of jurisdiction over all or part of the disputes. It is advisable to refer all disputes to Arbitration. Although parties are at liberty to refer only specific contract claims to arbitration, they may also expand the scope to include all disputes related to the contract, including non-contractual claims. In expressing this scope, Parties may use terms like “all disputes arising out of the contract”, “all disputes in connection or related to the contract”, or “all disputes arising under the contract”.

• Parties:

The parties to the Arbitration Agreement should be clearly stated, they should be natural persons or legal entities who are capable of entering into an agreement of this nature and against whom any award will be enforceable.

• Language of the Arbitration:

This is the language in which all submissions and evidence will be presented during the Arbitral proceedings. The parties should ascertain the language of the proceedings. The language of the arbitration also includes the words, clauses and phrases used in the agreement.  This is important especially where parties are from countries with different first languages.

• Number and appointment of Arbitrators

Depending on the complexity, technicalities and the nature of the dispute, a Sole Arbitrator or an Arbitral Tribunal should be specified. Appointing a Sole Arbitrator is cost effective but where the dispute is a complex one with high commercial and reputational value, it is advisable to use a tribunal which consists of three arbitrators. When the parties opt for a tribunal, each party would appoint an arbitrator and the 2 appointed arbitrators will then agree on a third arbitrator who should also be the chairman, where it is difficult to appoint the arbitrators, parties can agree that appointments be made by an appointing authority or body like the Nigerian Institute of Chartered Arbitrators (NICArb), LCIA etc.

• Features or qualifications of the Arbitrator(s)

One of the advantages of Arbitration over litigation is that it allows parties to determine the qualifications, characteristics, and experience that arbitrators should have before they can be qualified for appointment. This includes conditions like nationality, industry/sector experience, biases or previous relationships with any of the parties etc. This is not a compulsory requirement and parties should ensure that the category of arbitrators to be appointed is not unduly narrow and unrealistic.

• Seat of the Arbitration

This refers to the procedural laws of the arbitration. it determines the rights to enforce the arbitral awards and the interim remedies available to the parties. The seat of arbitration has to do with the procedural laws while the venue of arbitration is simply the physical place where the arbitration will take place.

• Governing law of the Arbitration Agreement

This is important especially for international transactions, the law of the substantive contract may be different from the law governing the arbitration agreement.

• Choice of rules to govern the Proceedings.

When drafting an arbitration agreement, you may want to adopt the rules of an established arbitral institution, such as NICArb rules or LCIA, to govern the arbitration proceedings. This enables the institution to administer the dispute (for a fee) based on its already established rules which are usually fair and impartial.  

• Consolidation and joinder of Arbitral proceedings

This is common in multi-contract arrangements, where different tribunals may be appointed to deal with multiple arbitrations in relation to the same or similar set of facts. Parties should ensure that the arbitration agreements in each interrelated contract allow for consolidation of the various arbitration arising from the same or interrelated contract as non-joinder of these different arbitrations may lead to additional costs, delays, and multiple conflicting decisions.  

1. Multi-tiered clauses

This avails the parties the opportunity to explore various stages and types of ADR mechanisms before finally exploring arbitration. Parties can attempt settlement of the disputes through other ADR mechanisms like Negotiation, Mediation or Conciliation before finally resorting to arbitration. This should be drafted with clear timelines which can be enforced with or without the active participation of any uninterested party in order not to frustrate the entire process.

Conclusion: Having discussed the various components and essential elements of a valid commercial agreement, I will share general guidelines for drafting all these components and a sample arbitration agreement will be provided in the next episode.