The inclusion of arbitration clauses in contracts is becoming increasingly common
With the spread of arbitration and its wide adoption in various sectors and business matters, it has become increasingly common to see parties requesting — and lawyers recommending — the inclusion of arbitration clauses in their contracts. We have already had the opportunity to discuss in Legislation & Markets some aspects about when to use this clause. The instrument has advantages and disadvantages that need to be analyzed in light of each contract.
Sometimes, the option for arbitration is made without due reflection, resulting in unusual situations. A clear example of this occurs when parties are forced to resolve simple and minor disputes through proportionally expensive procedures, which could be better handled by other means of conflict resolution. Business mediation, dispute resolutions (or dispute recommendation boards) and the Judiciary itself — notably with the conclusion of procedural legal transactions that facilitate the procedure — are some examples.
Once the choice is made consciously and thoughtfully by the arbitration, it is necessary to implement it appropriately. To this end, we have listed eight crucial points for arranging arbitration safely.
WRITING OF “FULL” ARBITRATION CLAUSES
“Full” arbitration clauses are those in which the parties agree on how arbitration will be instituted. In them, there is a prior definition of the number of arbitrators who will compose the arbitration panel and the method of their appointment. According to article 5 of the Arbitration Law, “full” clauses are self-enforceable — this means that the interested party can initiate an arbitration procedure without the support of the Judiciary.
In turn, the so-called “empty” clauses do not provide sufficient guidelines to enable the initiation of an arbitration and require a prior judicial process to complete this adjustment. Naturally, this prior judicial procedure can take years and significantly compromises the efficiency of the arbitration procedure.
REDUCE RISKS THAT MAY COMPROMISE THE VALIDITY OF ARBITRATION
The Arbitration Law does not impose many requirements on the arbitration clause. As a rule, as long as the parties have expressed in writing their interest in submitting their disputes to arbitration, the expressed will will be valid. However, concrete discussions about the validity of a certain clause or the arbitrability of a certain dispute can be significantly complex and require months — or even years — of proceedings to be resolved. For this reason, it is recommended to adopt a conservative stance when drafting the arbitration clause, avoiding provisions that could lead to nullity and mitigating its risk areas.
Franchise contracts, for example, still raise major controversies regarding their parity or adhesive nature. According to paragraph 2 of article 4 of the Arbitration Law, arbitration clauses inserted in adhesion contracts must meet specific requirements to be fully effective. Because of this, it is recommended to structure the arbitration clause in accordance with these special requirements to mitigate the chances of it becoming ineffective if the arbitration panel considers that it is dealing with an adhesion contract.
CLARITY REGARDING THE OPTION FOR ARBITRATION
One of the most common errors is the lack of clarity in the arbitration clause. It must use objective language to eliminate any doubts regarding the binding effectiveness of the option for arbitration, under penalty of opening room for discussions regarding the real will of the parties or — worse — giving rise to the invalidation of the arbitration award later before the Judiciary.
An example of this was the Graal case, in which the parties spent years discussing, before the Judiciary, whether or not the contract they signed would contain an arbitration clause. All of this is due to the laconic wording of item 11.8 of the contract: it stated that “doubts or disagreements arising from this shareholders' agreement must be resolved by mediation or arbitration”.
BEWARE OF THE SCOPE LIMITATION OF ARBITRATION CLAUSES
Limiting the scope of arbitration also deserves care. The high costs of an arbitration procedure have led to the drafting of clauses with reduced or limited scope. Sometimes, the parties agree on criteria such as the amount involved, subject matter or specific request for submitting the finished dispute to arbitration. An example of this are the ANP (National Petroleum Agency) production sharing contracts, which submit specific matters.
The risks arising are the discussions around the application of such criteria. The judicial process can be terminated as a result of the understanding that there is an arbitration clause — and the arbitration procedure can be interrupted by the opposite understanding, which reveals a true no-win situation. In effect, it creates obstacles to arbitration jurisdiction, restricts the use of grounds and, in some situations, leads to the fragmentation of claims before the Judiciary.
SELECTION OF THE APPROPRIATE ARBITRATION CHAMBER
As well as the future choice of arbitrators, the selection of the arbitration chamber is of fundamental importance so that the means of dispute are appropriate to the outcome. Each chamber has its own regulations regarding the matter, types of procedures and emergency arbitrator (dedicated to urgent, preliminary decisions). Naturally, each one adopts its own pricing and charging model for administration fees and arbitrator fees. For example: the costs of a camera It is important to consider whether the profile and costs of the chosen chamber are suitable for possible disputes that may arise in the future.
WRITING OF ARBITRATION CLAUSES COMPATIBLE WITH EACH OTHER
Some businesses require more than one contractual instrument to regulate rights and obligations as a whole. M&A operations, for example, involve a series of documents: confidentiality agreement, memorandum of understanding, share purchase and sale agreement, closing term, quotaholder or shareholder agreement, etc. As these are related instruments, if the arbitration clause is not very well structured, the existence of this multiplicity of contracts may compromise — or even make it impossible — to initiate the arbitration procedure. This is especially common when clauses inserted in these documents turn out to be incompatible with each other. Sometimes, the parties elect different arbitration chambers in each contract, or do not maintain consistency regarding the number of arbitrators that will make up the arbitration panel. In other cases, parties forget to include an arbitration agreement in subsequent contracts, raising doubts about the scope of the arbitration clause.
PECULIARITIES OF INTERNATIONAL CONTRACTS
The arbitration clause is particularly relevant in the context of international trade and operations involving parties domiciled in different countries. In addition to offering a “neutral” forum to resolve your disputes, arbitration offers extremely attractive instruments for international contracts, such as the possibility of choosing the law governing the contract and greater ease in executing the sentence abroad. However, to make the most of these special attractions, it is necessary to take extra caution when drafting the arbitration clause.
The definition of the seat of arbitration becomes especially relevant, as most legal systems define the nationality of the arbitration award based on it. As a rule, the ideal is to establish the headquarters in the place where the decision will have to be carried out, to avoid the need for ratification of the sentence. If the decision needs to be enforced in more than one country, it is recommended that the arbitration clause be structured in accordance with the legal standards of all of them, as there are international validation standards.
Particular attention must also be paid to the selection of the law applicable to the contract. In international contracts, it is common for parties to make only a vague reference to “international trade standards” or “internationally accepted practices”. This lack of definition compromises the resolution of the dispute and may result in unexpected consequences, depending on what the arbitration panel understands to be “internationally accepted practices”.
ELECTION OF JUDICIAL JURISDICTION
It is quite common for the parties to need to contact the Judiciary before or after the establishment of the arbitration panel. For this reason, in addition to the arbitration clause itself, it is of great value to elect in the same contract the judicial forum in which certain claims must be made, such as preliminary decisions (pre-arbitration provisional protection), forced compliance with an arbitration award (execution action) and, eventually, invalidation of the arbitration procedure (action to annul the arbitration award).
*Bruno Viana, associate at Freitas Ferraz Capuruço Braichi Riccio Advogados, collaborated.
