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Valid and effective arbitration clause. Global challenges.

Probably the issue of validity and effectiveness of arbitration clause is one of greatest practical importance for international arbitral process, giving rise to arbitration as such.

Clear intention to contract out of the national court system is needed as this is where most disputes are usually resolved. This can also be done by referring to a standard form contract in the agreement which incorporates an arbitration provision[1].

It is important first to distinguish the validity of arbitration clause from its effectiveness. Whereas the validity issue answers the question whether there is a legally acceptable and enforceable arbitration clause, the effectiveness deals more with its construction, efficiency and performance. Although an arbitration clause can be valid it does not necessarily should be effective.

Below we should refer to issues of validity and effectiveness separately.

With reference to the validity the difference should be drawn between the formal and substantive  validity[2] where both plays a fundamental role on applicability of arbitration clause for pro-arbitration regime[3]. Also, below we outline other important characteristics of parties’ agreement to arbitrate.

And at the end we will deal with issues of effectiveness.

  1. Validity.

Formal validity

  1. “Written form” accompanied with “signature” and/or “exchange” of communication[4];

The key sources of regulation to the formal requirement of a written form is given in a number of international and national rules[5]. The first place to look is Art. 2(II) New York Convention (the NYC) and Art. 7(2) UNCITRAL Model Law 1985 with its further modernization and liberalization in 2006. (the Law). [6]

The idea behind adopting requirements for written form at the time it was made is an indication of the parties’ consent and record of it to establish jurisdiction. Nevertheless, I fully support the criticism[7] of the outmoded requirements of NYC[8] as to the written form which clearly falls behind the changes which were made in Law amendments in 2006 and number of national legislations worldwide, allowing for the arbitration clause to be made in oral or tacit[9]. If the multi-billion agreements can be made orally, why arbitration agreements can’t?

it is worth noting that in certain circumstances the behavior of party may replace the compliance with formal written requirements[10].

Substantive validity

Globally the issues of substantive validity are vital, bringing many challenges of arbitration agreement on applicable contract law grounds[11].

  1. Compliance with international conventions

All major Conventions[12] treat arbitration agreements as presumably valid and enforceable, subject to limited cases of invalidity on where the relevant clause may be “null and void,[13]” “inoperative,[14]” or “incapable of being performed[15].”[16] European and Inter-American conventions also refer to “nonexistence” of arbitration clause where there has been no consent.

  1. Compliance with national law

The majority of national legislation does not have special regulation as to the invalidity of arbitration agreements (except as provided in International Conventions[17]) and is commonly governed by applicable contract law[18] (either the law of the arbitral seat or the underlying contract).[19] The burden of proof in such cases is usually on the contesting party[20]. As an example of the application of these criteria, an arbitration agreement may become ‘inoperative’ for the purposes of section 9(4) through the actions of a party amounting to a repudiatory breach. [see Downing v Al Tameer Establishment & Anor. [2002] EWCA Civ 721.

  1. Reference to standard terms.

It is common that an arbitration clause can be included in standard or general terms, whether it is in same document (on reverse side) or a separate document. In such case parties should either have availability of document or made a specific reference to it - incorporation by reference Also the arbitration clause may be valid if incorporated by the third parties, like in B/L which incorporates the terms of Charterparty[21].

  1. Capacity to enter agreement. Consent. Assignment.

The capacity of the parties originates from the law applicable[22] to the parties[23], since neither convention prescribes rules governing the capacity.[24] NYC and European Convention addresses this issue indirectly and in very general terms.[25]

Despite some economies (e.g. controlled) may have certain limitations within national legislation[26], it has become common that tribunals in most circumstances taking pro-arbitration approach. In majority of cases the tribunals uphold validity of agreements by application of principles of estoppel, ratification and good faith[27].

Some Tribunals[28] even extend the arbitration clause to the parent and subsidiary companies, despite lack of formal signature. Worth noting also that assignment of arbitration clause is possible automatically[29] if not excluded by the parties or during pending arbitration[30].

Other essential characteristics of valid arbitration clause. 

  1. Arbitrability.

Non-arbitrability doctrine has a different nature from substantive validity, limiting specifically the right of the parties to arbitrate certain types of disputes[31]

  1. Separability.

As a matter of general rule, the consent given by the parties to the contract does not necessarily mean consent to the arbitration clause. The critical issue is whether parties made a valid consent to the agreement to arbitrate itself.

  1. Effectiveness.

There are generally three[32] fundamental criteria for the effective clause[33]: (1) agreement to arbitrate; (2) scope; and (3) finality

Agreement to arbitrate.

Rather straightforward requirement providing the express parties’ intention to arbitrate rather than litigate. Arbitration should be the only[34] forum where the disputes should be resolved.

Scope of arbitration.

Fundamental issue when considering the effectiveness of the clause is weather the parties’ language[35] of agreement extends to all contractual (or noncontractual, e.g. tort, delict) claims making it a subject of arbitration or only to a limited ones. Presently, the most of jurisdictions holds a pro-arbitration approach in this respect.

Broad wording of clause is of the essence providing “all” or “any” claims to be covered by arbitration. The narrower wording may lead to consequences where tort and other non-contractual claims were recognized as giving no rise to arbitration. However the recent findings of the House of Lords in Premium Nafta v Fili[36] make it less relevant. If there is nothing in[syntax unclear here?] contrary it illogical to assume that parties had intention to “split” jurisdiction[37].

Basically there was a move away from the overly formalistic approach. Lord Hoffmann  in that case first reviewed the terms of the standard ‘Shelltime 4 Form’ arbitration clause as only “the agreement can tell you what kind of disputes they intended to submit to arbitration.” The starting position in the construction of an arbitration clause should be that rational businessmen intend that all disputes arising out of that agreement will be decided by the same tribunal. This presumption should be applied unless there is express language to the contrary. Lord Hoffmann declined to consider in detail the extensive case law on the scope of specific wordings used in arbitration clauses – ‘arising under’ or ‘arising out of’ -  as he agreed with the Court of Appeal that “the time had come to draw a line under the authorities to date and make a fresh start.” Lord Hope of Craighead in his separate assenting opinion confirmed this approach in particular in the context of international commerce. 'This view is consistent with the approach adopted in other jurisdictions. Lord Hoffmann cited a German Bundesgerichtshof Decision of 1970 and Lord Hope of Craighead referred to decisions from the courts of the United States and Australia to conclude that arbitration provisions should be construed as broadly as possible and to prevent different proceedings in alternative fora.'

Finality of the award.

Providing in writing a “one stop” forum is essential for fast and efficient arbitration process. Still respective attention should be made to national laws which in majority of cases allows limited rights to appeal. For example Arbitration Act 1996 gives parties a right to appeal either on issues of serious irregularity (art. 68) or on a point of law (art. 69). This latter is not possible if institutional rules confirm award is final and binding e.g. LCIA or ICC. section 68 is a mandatory provision - that is the parties can not contract out of the possibility of a challenge for procedural irregularity.

Other relevant considerations.

Many practitioners[38] and law associations provide generally similar recommendations to this effect. I shall outline the fundamental ones:

  1. Decide between ad hoc or institutional arbitration;

Institutional provide usually all necessary assistance, rules and procedures, facilities, etc for a certain fee, unlike ad hoc arbitrations where parties all liable for running arbitration, which sometimes leads to many disputes on the procedure.

  1. Seat of arbitration;

It may influence on the law that is applicable to arbitration and courts of which jurisdiction should make assistance and/or support of process. Friendly to arbitration jurisdictions is highly recommended.

  1. Arbitrators/Tribunal;

Usually one or three arbitrators[39]. Thus, the cost may vary greatly since parties pay for their services. Appointment much depends on parties’ agreement or applicable rules.

  1. Language, procedure, timetable, cost, confidentiality.

Also worth to be agreed at the initial stage. Usually depends on the arbitration rules that is to apply or agreement between parties made before or during the proceedings. Especially if dealing with parties with different languages.

Multiparty arbitrations.

In case of joint-venture, consortium or similar agreements where more than two parties involved the arbitration clause should anticipate possibility of multiparty arbitration. The key challenge is the managing of procedure (e.g. submissions exchange or oral hearings). and arguably the appointment of the tribunal?


There is a distinction between the formal validity of an arbitration agreement and the criteria that make it an effective clause. Most courts will interpret the clause in a pro arbitration manner. Once consent to arbitration is found, a lot of time and money could be spent in trying to determine the specific details of the arbitration.

If the parties could agree to specific terms this would be the best outcome but experience shows that once a dispute has arisen that there is very little chance of the parties reaching any consensus on the details. The courts will try to be as helpful as possible but can do little to prevent delay in the face of a reluctant party.

Formal validity including the requirement that the arbitration agreement be in writing is critical. The remainder of the criteria make the arbitration agreement effective for example, the seat, language and applicable law.

Most international arbitration institutions have Model arbitration clauses that deal in brief with the main issues. An arbitration clause does not have to be long and detailed so long as it is clear and precise so as to ascertain the parties’ intention.

[1] See for some examples of cases where incorporation by reference was accepted Stretford v Football Association Ltd and another  [2007] EWCA Civ 238 and Sumukan Ltd v The Commonwealth Secretariat [2007] All ER (D) 341

[2] Julian Lew, “The Law Applicable to the Form and Substance of the Arbitration Clause»

[3] Gary B. Born, “International Commercial Arbitration” (Second Edition), par. 5-02, p. 657

[4] Ibid p. 656

[5] Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 7-6, p. 131

[6] The NYC provides very narrow definition failing to foresee the development of communication tools. The Law instead made a step forward with broader definition allowing modern means of communication and record of agreement evidence and finally in 2006 Law allows practically oral form agreement.

[7] Kaplan, “Is the Need for Writing as Expressed in the New York Convention and the Model Law Out of Step with the Commercial Practice?”;

[8]We have to recognize the problems involving changes in any part of NYC and put attention and efforts to promote the changes to national legislations and more liberal approach while treating NYC requirements during award enforcement procedure as to the written form.

[9] States that allows arbitration agreement to be made orally either formally or in effect: France, New Zealand, Sweden, Scotland, Singapore, Hong Kong. Germany allows tacit agreement when no objection is submitted. Swiss provides a unique regulation specifically addressing the validity issue requiring evidencing agreement by a text. English Arbitration Act 1996 allows certain categories of oral agreements.

[10] In Compagnie de Navigation et Transport SA v Mediterranean Shipping, Tribunal Fédéral 1995 the Swiss Tribunal resorted to doctrine of estoppel and good faith where consent was confirmed by parties’ conduct in the past.

[11] For example fraud, mistake, frustration, impossibility, waiver;

[12] Art.II of the NYC, art. 1 of the Inter-American Convention and less clearly Art. II(1), IV and V of the European Convention;

[13] Cases in which an arbitration agreement was defective or invalid from the outset - fraudulent inducement, unconscionability, illegality and mistake;

[14] Cases where agreements were at one time valid, but which thereafter ceased to have effect;

[15] Cases where the parties have agreed upon a procedure that is physically or legally impossible to follow;

[16] New York Convention, Arts. II(1), (3); UNCITRAL Model Law, Arts. 7, 8(1);

[17] Worth noting that UNCITRAL Model law contains no provisions of substantive validity;

[18] National courts, dealing with issues of validity generally examining arbitration agreement as to the cases of fraud, mistake, duress, lack of consideration, unconscionability, impossibility and frustration to the substantive validity of international arbitration agreements.

[19] Gary B. Born, “International Commercial Arbitration” (Second Edition), par. 4.04, p. 472

[20] Ibid, p. § 5.06 (2) p. 844-845

[21] Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 7-37, 7-43 p. 144-145

[22] Either the place of domicile of the party or law applicable to arbitration agreement

[23] Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 7-33, p. 140

[24] Gary B. Born, “International Commercial Arbitration” (Second Edition), par. 5-023, p. 721

[25] NYC by implication to capacity provides non-recognition of arbitration agreements only if they are “null and void, inoperative or incapable of being performed.”. European Convention provides that courts shall examine the capacity of the parties under the law applicable to them.

[26] Where license is required, limitation in POA, no proper authorization by person who signed agreement, etc.

[27] Interim Award in ICC Case No. 5065, 114 J.D.I. (Clunet) 1039, 1043 (1987) (“in accordance with general principles of international commercial law, usages and…good faith,…the existing entity is personally bound.”); Balen v. Holland Am. Line Inc., 583 F.3d 647, 655 (9th Cir. 2009) (seaman bound by arbitration provision in collective bargaining agreement notwithstanding fact that agreement was signed by an employment agency on behalf of employer);;

[28] ICC case no 5721 (1990), 117 Clunet (1990)

[29] Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 7-52 - 7-57, p. 147

[30] Merkin, Arbitration Act, para. 2-33, 2-37;

[31] (e.g. arising from land, property, competition, etc.). The latest draft of Commercial Code in Ukraine is intended to treat the disputes arising from privatization of government property as non-arbitrable.

[32] In this respect the requirements for arbitration clause to be properly workable produced by Eisemann  are also of essence:

(1) produce mandatory consequences; (2) exclude the intervention of state courts; (3) give power to arbitrators; and (4) put a procedure leading to enforceable award;

An arbitration clause may be considered as defective or pathological when it deviates from any one of the above four elements. The consequences vary greatly depending on the level of deviation. Mr. Eisemann coined the term “pathological clauses” in “La clause d’arbitrage pathologique” in Commercial Arbitration Essays in Memoriam Eugenio Minoli (Torino: Unione Tipografico-editrice Torinese, 1974)

[33] Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 8-9 p. 167

[34] In my practice I had a dispute where the arbitration clause provided resolution of dispute either in arbitration in Ukraine or litigation in Russia depending on which party shall be claimant (from Russia or Ukraine). Both parties applied to respective forum, one in Ukraine other in Russia. The Ukrainian arbitration refused on jurisdiction according to competenz-competenz principle sine the claimant from Russia submitted their claim first.

[35] The model clauses recommended by institutions vary significantly in terms of language of the clauses providing “all” or “any”; “disputes”, “differences” or “controversies”; “relating to” or “in connection with”; etc.


[37] Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 7-67, p. 153

[38] For example: Hoggan Lovels; Clyde and Co.; Freshfields; IBA Guidelines for Drafting International Arbitration Clause - file:///C:/Users/Ivan/Downloads/Guidelines%20for%20Drafting%20Intl%20Arbitration%20Clauses%202010.pdf

[39] In contrast GAFTA and FOSFA rules provide appeal procedure to be conducted by 5 arbitrators;

Ivan Kasynyuk, Partner at AGA Partners


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