Five Top Tips To Consider When Drafting An Arbitration Clause

• Confidentiality: Companies and commercial institutions are very often reluctant to disclose the commercial information underpinning their disputes, which may involve trade secrets, internal decision-making process, and competitive practices. Court litigation will often be open to the public and press, and certain documents filed with courts may also be inspected; whereas in normal circumstances arbitral proceedings are private and kept confidential.
• Enforceability: At the end of the arbitral process after hearing the case from each party, the tribunal will provide its decision in the form of an “award”. An arbitration award is final and binding on the parties. Generally, it is not subject to review on the merits and it can only be challenged under limited grounds by way of a set aside application with the court supervising the arbitration (typically on procedural grounds).

The international enforcement of arbitration awards is significantly easier than enforcing a foreign court judgment in an overseas court. There are more than 170 signatories to the New York Convention,[1] under which states undertake to recognise and enforce arbitral awards made in other signatory states.

• Customised processes: Arbitration offers flexibility, as the process can be tailored to meet the needs of the dispute. Parties can agree on procedural issues, rather than being confined by rigid court procedure rules. They also have options to request for joinder of third parties, consolidation of multiple arbitrations and expedited procedures. Significantly, parties can also select an arbitrator with skills, specialised knowledge and experience relevant to their dispute. Arbitration can also be quicker than court because service of documents in arbitration is typically quicker than service of court documents. In some circumstances, the flexibility to design an appropriate process to resolve the dispute may also facilitate cost savings.

When parties decide to submit their future disputes in relation to a contract to arbitration, they need an agreement to arbitrate – this is usually achieved by including an arbitration clause in the underlying transaction’s contract documents. However, given that almost every party believes theirs is not the matter that is going to lead to a dispute, a very small amount of time is typically dedicated to negotiating an appropriate arbitration clause. Further, while this concept of including an arbitration clause in contracts is simple, the drafting of a clause is not. Indeed, a recent dispute over the effect of a multi-tiered arbitration clause went all the way to Hong Kong’s highest court, entirely derailing the arbitration process.

To avoid uncertainty and prevent collateral disputes about the clause itself, we offer the following five key tips to bear in mind when drafting an arbitration clause:

1. Use a model clause.
2. Choose a suitable seat of arbitration with the necessary legal infrastructure.
3. Consider the number of arbitrators based on the types of disputes that might arise.
4. Decide whether to require non-binding alternative dispute resolution processes before commencing arbitration.
5. Expressly state the governing law for the agreement to arbitrate.

We elaborate on each of these tips below.

Start With A Model Clause

To begin with, make sure you have an arbitration clause. 

Typically, parties will choose a particular arbitral institution to administer the arbitration (as opposed to conducting ‘ad hoc’ arbitration, where the tribunal has to administer the arbitration itself, often resulting in more skirmishes about procedure). 

Leading arbitration institutions such as the Hong Kong International Arbitration Centre (HKIAC), Singapore International Arbitration Centre (SIAC), the International Chamber of Commerce (ICC), and the China International Economic and Trade Arbitration Commission (CIETAC) all have ‘model clauses’ which parties may choose to adopt. 

For instance, the HKIAC’s model clause is as follows:

"Any dispute, controversy, difference or claim arising out of or relating to this contract, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non-contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration administered by the Hong Kong International Arbitration Centre (HKIAC) under the HKIAC Administered Arbitration Rules in force when the Notice of Arbitration is submitted.

The law of this arbitration clause shall be ... (Hong Kong law).

The seat of arbitration shall be ... (Hong Kong).

The number of arbitrators shall be ... (one or three). The arbitration proceedings shall be conducted in ... (insert language)."

While model clauses are significantly better than no clauses and a poorly drafted bespoke clause, they are but a very helpful starting point. Parties should then refine model clauses based on their specific circumstances and actual needs.

Choose A Suitable Seat Of Arbitration With The Necessary Legal Infrastructure

In international transactions, contracting parties are typically from different countries. As such, parties often choose a third forum in which neither party is incorporated.  This avoids any perception of ‘home court advantage.’ Besides such neutrality, it is desirable for the seat to have strong local courts and a judiciary that respects the autonomy of arbitral tribunals, and which is ready to provide appropriate support for matters such as interim relief and the effective enforcement of awards. It is also helpful to select a jurisdiction with a large body of arbitration lawyers that can advise parties in the matter.

Two of the most popular choices in Asia are Hong Kong and Singapore. 

One of the unique benefits of choosing Hong Kong as the seat of arbitration is the availability of effective cross-border interim relief. The Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the HKSAR (which came into force in 2019), allows parties to Hong Kong-seated arbitration the means to apply directly to Mainland China courts for interim measures (eg asset and evidence freezing), and vice versa. Currently, such an advantage is unavailable to any other jurisdiction. As a result of this benefit, often, if there is a PRC element to the transaction such as potential assets that might be enforced against, international parties are keen to select Hong Kong as a seat.

Singapore is also a very popular choice of seat for international arbitration, particularly for South-East Asian transactions, given its central location in that region, sophisticated courts and institutions, and skilled body of legal professionals.

Consider The Number Of Arbitrators Based On The Types Of Disputes That Might Arise

Parties should make a deliberate choice as to the number of arbitrators to hear their dispute:  typically, the choice is one or three. Having a sole arbitrator is suitable for disputes that are anticipated to be relatively straightforward and of lower value, to economise time and costs. However, in situations where anticipated disputes are likely to be complex, or where there is likely to be a very substantial amount in dispute, appointing three arbitrators is often preferred to reduce the risks arising out of relying entirely on one arbitrator. 

Decide Whether To Require Non-binding Alternative Dispute Resolution Processes Before Commencing Arbitration

Adding to a model clause, parties can also include pre-arbitral steps in a multi-tiered dispute resolution clause. Such clauses involve a series of steps, such as direct negotiation, followed by formal mediation, before referring the dispute to arbitration. The earlier steps are designed to encourage direct settlement and preserve commercial relationships, without recourse to costly and polarising adversarial proceedings.  

When designing a multi-tiered dispute resolution clause, it is important to use tiers that are appropriate for the foreseeable types of disputes. Also, when contemplating the structure of the clause, it is crucial to incorporate clear triggers, and a timeframe for how long each step should be attempted and when to move to the next step. Whether completion of one resolution process is intended to be a pre-condition to the commencement of another stage should be made clear.

In the high-profile Hong Kong case, C v D [2023] HKCFA 16, the parties could not agree on whether, according to their arbitration clause, it was mandatory to refer the dispute to the CEOs. Disputes relating to this case reached the highest Court in Hong Kong. The case illustrates the importance of defining the contemplated steps precisely and in unambiguous terms. 

Expressly State The Governing Law For The Agreement To Arbitrate

The law governing the arbitration agreement is important since it will apply to the arbitral procedure and process.  However, the significance of explicitly specifying such law is often overlooked. Parties may also confuse it with the law governing the substantive contract. In fact, an arbitration clause is autonomous and separable from the other clauses in the agreement, and so it can be governed by a different law, and it does not always follow that the law governing the substantive contract will definitely govern the arbitration clause – this matter has been subject to countless court cases in England & Wales, Hong Kong, and Singapore.

When parties disagree on which law is applicable to the arbitration agreement, they will often need to resort to court to resolve this satellite dispute. For example, one of the issues arising in a recent Singapore Court of Appeal case Anupam Mittal v Westbridge Ventures II Investment Holdings [2023] SGCA 1, concerned the proper law of the arbitration agreement. The case also concerned a wider question of which system of law determines subject matter arbitrability at the pre-award stage: the law of the seat or the proper law of the arbitration agreement[2]. In this case, the relevant governing law clause did not explicitly state that it also applied to the arbitration agreement. The court refused to imply Indian law (the governing law of the contract), as it would have had the effect of frustrating the arbitration agreement. Instead, the court held that absent an express or implied choice of law, the law of the seat, Singapore law, was the system of law with the closest and most real connection to arbitration agreement. Applying Singapore law to the arbitration agreement, the court found that the dispute was arbitrable, and maintained the anti-suit injunction granted at first instance.

What makes things even more uncertain, is that how the court determines this applicable law issue differs depending on which jurisdiction that court is in. The different facts and circumstances of each case will also be relevant. Therefore, it is best to state the governing law expressly to avoid any potential argument and to minimise costs.

In conclusion, while dispute resolution clauses are very often not the focus of contracting parties, experience shows that good and careful drafting would save parties from spending significant extra time and money on satellite procedural disputes, enabling them to focus on the substantive underlying issues at stake.

1 The Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 https://www.newyorkconvention.org/

2 For more discussion on the ‘composite’ approach taken by the Singapore Court see KWM Pulse “Anupam Mittal v Westbridge Ventures II Investment Holdings: Novel Singapore Authority on the Question of Arbitrability July 2023 https://pulse.kwm.com/international-arbitration/anupam-mittal-v-westbridge-ventures-ii-investment-holdings-novel-singapore-authority-on-the-question-of-arbitrability/#_ftn8

Paul Starr
Paul is Head of the Dispute Resolution Team and Global Joint Coordinator of the International Arbitration Team at King & Wood Mallesons, Hong Kong. He specialises in construction, dispute resolution and international arbitration.

Suraj Sajnani
Suraj is a Senior Associate at King & Wood Mallesons, working across Singapore and Hong Kong. He specialises in dispute resolution, international arbitration, technology, construction, and FinTech.

Sian Knight
Sian Knight is a Professional Support Lawyer with King & Wood Mallesons, Hong Kong. Sian specialises in construction, dispute resolution and international arbitration.

Jenny Fok
Jenny Fok is a Legal Manager with King & Wood Mallesons, Hong Kong. She specialises in construction, dispute resolution and international arbitration.