How to make an arbitration clause for an international treaty

Mainstream

An arbitration clause is not a technical formality at the end of a contract. This is the foundation for protecting the business in case of a dispute.

The main issue is not that the reservation is just there. The main question is whether it will work in a real conflict situation, when the debtor disputes jurisdiction, delays the process and withdraws assets.

An effective reservation begins with three basic checks:

1. Is the dispute resolution mechanism indisputable and enforceable?
2. Is it possible to effectively conduct the process and obtain a solution within a reasonable time and at a reasonable cost?
3. Where and how the future arbitration award will be enforced.

If these issues are not resolved before the contract is signed, the company may face the “paralysis” of the clause. This is a situation where arbitration can be started, but it is possible to win it quickly without spending a critical amount of money, and, most importantly, it is impossible to execute the decision.

When a reservation ceases to be a formality

The need for a surgically accurate arbitration clause becomes critical if:

• the counterparty is in a jurisdiction with a complex judicial system;
• the amount of the transaction is significant for the business;
• the contract is long-term (delivery, distribution, joint venture);
• The structure of the transaction includes holding companies, offshore companies or nominee holders of assets;
• execution of the decision is planned in countries that are not in the jurisdictions convenient for recognition;
• The dispute is potentially related to sanctions risks;
• Protect your know-how and confidential information in the process.
• The contract is governed by the law of one country and arbitration takes place in another;
• The parties have agreed on an EPC contract, an M&A transaction, an investment or licensing agreement.

The mistake that most negotiators make

Many companies insert a template clause found online or copied from another agreement into the contract. She looks "standard."

It's a dangerous illusion.

The right approach is not to “check the box”, but to design a dispute resolution mechanism.

Sometimes the best choice is ad hoc arbitration. Sometimes arbitration under the auspices of a well-known institution with an accelerated procedure. Sometimes it is a combination of mediation and arbitration. Sometimes, the choice of a place of arbitration, neutral for both parties, but convenient for execution of the decision in a particular country of the debtor.

An effective clause requires not copying but designing.

Step 1. Select the type of arbitration: institutional or ad hoc

The first question to be addressed is: Whether the dispute will be administered by an arbitration institution or whether the parties will follow the ad hoc path.

Institutional arbitration (ICC, LCIA, VIAC, SCC, SIAC, etc.) is preferred if:

• A predictable procedure is required;
• The parties are in different legal traditions;
• high risk of delaying the process by the unscrupulous party;
• quality control of the arbitration decision by the institute is required;
• The contract price justifies the administrative costs.

Ad hoc arbitration (usually based on the UNCITRAL Arbitration Rules) may be appropriate if:

• The parties want to limit administrative fees;
• The dispute concerns a highly specialized industry;
• It is important to minimize formalism.

The mistake is to choose ad hoc without appointing an ad hoc appointing authority. This creates a risk of paralysis of the process if the parties do not agree on the composition of the arbitration.

Step 2. Determine the place of arbitration

The place of arbitration is not necessarily a place of hearing. It is the legal “home jurisdiction” of arbitration.

The choice of location determines:

• applicable procedural law (lex arbitri);
• the extent of interference of state courts in the process (assistance or blocking);
• standards of impartiality and independence of arbitrators;
• grounds for setting aside the award;
• availability of interim measures;
• the possibility of arbitrability of specific disputes (for example, bankruptcy, intellectual property).

Typical preferred locations: Vienna, Stockholm, London, Paris, Geneva, Singapore. The choice should always take into account where the award will ultimately be enforced and whether the jurisdiction of the place of arbitration is party to the 1958 New York Convention without significant reservations.

Step 3. Formulate the subject matter of the dispute

One of the most common pathologies: The reservation is narrowly drawn up and covers only disputes “out of this treaty”.

An effective reservation should cover:

• disputes related to the conclusion, validity, interpretation, execution, violation and termination of the contract;
• demands from unjust enrichment;
• pre-contractual disputes;
• disputes related to related agreements and guarantees;
• tort claims if they are related to the subject matter of the transaction.

This prevents parallel processes and objections to the lack of arbitration competence.

Step 4. Determine the number and qualifications of arbitrators

A reservation should clearly specify:

• one or three arbitrators (for large transactions, usually three, for simplified transactions - one);
• the mechanism of appointment (each party appoints one, two appointed arbitrators appoint a chairman, or the institution appoints all);
• qualification requirements (e.g. knowledge of a specific law, experience in M&A, construction, maritime law, lack of citizenship of the parties).

The vague wording about the “admissibility” of arbitrators creates the ground for delaying the formation of the composition.

Step 5. Determine the language of arbitration

The language of arbitration is not just a translation task. This:

• the language in which the pleadings will be filed;
• language of oral hearing;
• language of the award.

It is a mistake to assign two languages without specifying which of them witnesses will be questioned and evidence examined. This doubles the cost of translation and creates procedural conflicts.

A strong clause expressly states the language of the proceedings and states that documents in another language may be submitted, but the arbitral tribunal may request a translation.

Step 6. Include or exclude the accelerated procedure

Many institutions (ICC, SIAC, VIAC, SCC) offer expedited procedure rules. A reservation may expressly provide for its application to disputes below a certain amount or exclude it for complex transactions.

The right clause governs this choice without leaving it to the discretion of the institution or opponent in a future dispute.

Step 7. Settlement of Multilateral Disputes and Accession

In complex transactions (equity agreements, joint ventures, EPC consortiums), the standard two-way clause destroys the entire process.

An effective reservation should:

• allow the merger of several arbitration proceedings (consolidation);
• provide for a mechanism for accession of new parties (joinder);
• to regulate the appointment of arbitrators in the case of a plurality of plaintiffs or defendants.

Without these mechanisms, there is a risk of parallel incompatible solutions and the impossibility of involving all the obliged persons.

Step 8. Do not mix jurisdictions

It is a fatal mistake to include in the contract both an arbitration clause and a prorogation agreement in favor of a state court at the choice of one of the parties, or to specify that “disputes are considered in arbitration or in a court of the choice of the plaintiff”.

This design is considered pathological and unenforceable in most jurisdictions. A party that does not wish to arbitrate is given the ideal instrument to challenge competence.

A reservation must be exclusive and unequivocal.

Step 9. Verify compatibility with interim measures

The arbitration clause should not block the possibility of applying to a state court for interim measures (seizure of assets, freezing injunction). Most modern regulations and national laws allow for this, but it is desirable to state explicitly in the contract that the reservation does not deprive the parties of the right to apply for interim measures to the competent court.

This is especially important if there is a time gap between the dispute and the arbitration panel during which assets can be withdrawn.

Step 10. Testing the sustainability clause

Before signing a treaty, a reservation must be tested for four key vulnerabilities:

1. Feasibility. Can it be challenged because of defects in form, lack of authority of the signatory or violation of peremptory norms?
2. Complete. Does it contain internal gaps (not specified institution, place, rules)?
3. Applicability. Does it cover all potential disputes in the transaction?
4. Economic feasibility. Does the cost of potential arbitration match the amount of the transaction?

The reservation should not be designed for the “ideal” scenario, where the parties are ready to cooperate, but for the conflict scenario, where the counterparty evades any interaction.

Arbitration clause vs. Prorogation agreement: pick

The choice is not determined by abstract preferences, but by the map of the debtor’s assets and the forecast of the place of execution of the future decision.

How to strengthen a reservation before signing a treaty

The best clause is created at the structuring stage of the transaction, not the closing stage.

An international commercial contract should include:

• a clearly designated arbitral institution or ad hoc rules;
• the place of arbitration with a favorable procedural law;
• language of the proceedings;
• the number of arbitrators and the mechanism for their appointment;
• qualification requirements of arbitrators (if necessary);
• wide arbitrability (coverage of related and tort requirements);
• the provision on the accelerated procedure (if necessary);
• consolidation and accession mechanism (in complex transactions);
• the right to seek interim measures of protection;
• Provisions on the allocation of costs and the right of arbitrators to award legal costs;
• the mechanism for appointing an arbitrator for an evasive party;
• the confidentiality of arbitration (if applicable rules do not guarantee it).

Typical errors in the preparation of an arbitration clause

1. The pointing to arbitration and the court simultaneously blocks both forums.

2. Without it, in case of dishonesty of the opponent, arbitration may not start.

3. The feasibility of the decision and the grounds for its cancellation are determined by the place of arbitration. A mistake is worth the whole strategy.

4. A narrow arbitration clause excludes related claims from the jurisdiction of the arbitration, forcing parallel processes.

5. Ignoring the language of arbitration doubles the costs and creates procedural risks.

6. In multi-party transactions, the standard clause makes the process impossible.

7. A template approach is to copy someone else’s reservation without analyzing the applicable law, the debtor’s assets and the specifics of the transaction.

8. Silence on interim measures creates uncertainty in the period before the composition of the arbitration, critical to the preservation of assets.

Checklist for verification of arbitration clause

Before signing the contract, you need to answer 15 questions:

1. Is the reservation unequivocal and exclusive?
2. Is the arbitration institution or ad hoc rules clearly specified?
3. Is the place of arbitration determined?
4. Is there a number of arbitrators and a mechanism for their appointment?
5. Is there a nominating authority for ad hoc arbitration?
6. Is the language of the proceedings indicated?
7. Does the clause cover all potential disputes in the transaction?
8. Is the issue of the accelerated procedure resolved?
9. Does the reservation work in the case of multiple parties?
10. Is the right to seek interim measures of protection retained?
11. Is the reservation compatible with the applicable law of the treaty?
12. Are the place of arbitration and the likely enforcement state parties to the New York Convention?
13. Are the costs of potential arbitrage in line with the economics of the transaction?
14. Are there any hidden sanctions risks in the forum?
15. Has the condition been checked for pathological defects?

What a strong caveat looks like

A strong caveat doesn’t have to be long, but it does have to be surgically accurate.

It is built as a five-level system:

1. Jurisdiction framework: The undisputed choice of arbitration that excludes state courts.

2. Clear rules, place, language, composition and mechanism for appointing arbitrators.

3. Script coverage: Broad arbitrability covering related and non-contractual requirements.

4. Access to interim measures, confidentiality, mechanisms against delaying the process.

5. Direct orientation to the location of the debtor's assets for future recognition and enforcement of the decision.

Without a fifth level, the first four can be a costly legal abstraction.

FAQ

Can the standard clauses of arbitration institutions be used?

Yeah, that's a good base. But even the ICC or LCIA standard clause requires adaptation in terms of the place of arbitration, language, number of arbitrators and the mechanism of appointment. Blind copying without adaptation is a risk.

What if the contract has already been signed and the reservation is pathological?

An audit of the reservation should be carried out. Sometimes a defect can be corrected by an additional agreement. If the counterparty evades, develop a strategy in case of dispute, based on the most likely interpretation of the reservation by the competent court or institution.

Can I choose a non-parties arbitration venue?

Yes, neutrality is standard practice. It is only important to make sure that the procedural law of this place does not create an obstacle to your type of dispute and that the place is convenient for future enforcement.

What's cheaper? ad hoc or institutional arbitration?

Ad hoc can be cheaper at the start, but the lack of control by the institution in the case of an unscrupulous opponent sometimes leads to costs many times higher than administrative fees. The choice should be strategic, not just financial.

Does the arbitration clause affect the pre-trial settlement?

Yeah. A properly drafted clause with a step-by-step mechanism (negotiation – mediation – arbitration) creates a powerful pressure for settlement, as the opponent understands that when negotiations fail, a quick and final arbitration is triggered.

Can an arbitration clause protect against sanctions risks?

Directly, no, but choosing the right arbitration location and the currency to pay arbitration fees can reduce the operational risks of blocking the process due to sanctions restrictions.

Related services

• International Arbitration, Commercial Litigation & Cross-Border Disputes
• International Trade, Distribution & Cross-Border Transactions
• Commercial Contracts
• Sanctions, Export Controls & International Compliance
• International Regulatory Risk & Strategic Advisory
• Asset Tracing & Enforcement Strategy

Related material

• How to choose an arbitration institution for an international contract
• Pathological arbitration clauses: review
• International Arbitration and State Courts: division of competence
• How to enforce an arbitral award in Europe
• Recognition and enforcement of New York Convention arbitral awards
• Asset tracing: How to find the debtor’s assets before the arbitration
• Interim measures of protection in support of international arbitration
• Sanctions and international arbitration: practicalities
• How to check a foreign counterparty before signing a contract

Conclusion

Preparation of an effective arbitration clause is not a technical stage of closing a transaction, but a key element of an asset protection strategy.

A strong clause is projected from the point of final execution: where the debtor’s assets are located, how to get there with an arbitral award and what obstacles may arise in the way.

In international arbitration, the winner is not the one with the “standard” clause. The winner is the one who, at the stage of signing the contract, has created an indisputable, fast and executable dispute resolution mechanism.