Arbitration, as an alternative method of dispute resolution, may encompass a wide range of subject matters. Regardless of the geographical scope governing a contract, such matters may arise in commercial agreements, employment contracts, confidentiality agreements, foreign investment arrangements, and other possible agreements between the parties. Each of these, depending on its nature, has its own distinctive characteristics.
Accordingly, arbitration clauses in contracts may be required to address specific requirements aligned with the agreement’s subject matter, which can play a significant role in ensuring the proper performance of the parties’ obligations.
In what follows, we examine the principles governing the drafting and formulation of arbitration clauses in contracts and analyze the essential characteristics of comprehensive arbitration clauses, along with the criteria that distinguish them.
Should you require analysis, review, or redrafting of the arbitration clauses contained in your contracts, the specialized team of Karimi & Associates Law Firm stands ready to provide professional legal services.
Validity
An arbitration clause primarily reflects the parties’ consent to submit their disputes to arbitration. In general, the inclusion of the term “arbitration” within the dispute resolution clause of a contract constitutes prima facie evidence of the parties’ consent. Nevertheless, it is always preferable, in contractual drafting—particularly with respect to arbitration clauses—to avoid any ambiguity in the language used. An arbitration clause must not be formulated in a manner that casts doubt on the parties’ intention to resort to arbitration. Such doubt may arise, for instance, where a parallel right of access to state courts is expressly provided alongside arbitration, or where the clause allows for an appeal or review of the arbitral award.
Many national arbitration laws, as well as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, require that the arbitration agreement be in writing. The rationale behind this requirement is that referring disputes to arbitration is, in practice, considered a waiver of the right to recourse to ordinary state courts. However, this requirement does not preclude the parties’ obligations and the arbitration agreement from being set out across more than one contractual instrument.
Scope of Application
An arbitration clause must be drafted in a manner that encompasses all disputes arising out of or in connection with the contract, and should exclude only those matters for which the parties have expressly and mutually agreed to resort to an alternative method of dispute resolution. As a best practice, the arbitration agreement should, to the greatest extent possible, follow the standard and recommended wording of the relevant arbitral institution, as such model clauses are designed to cover a broad and comprehensive range of potential claims. For instance, where the parties intend to refer their future disputes to the Arbitration Center of the Iran Chamber (ACIC), it is advisable to adopt the institution’s model arbitration clause.
Another important aspect of the scope of an arbitration clause arises when the parties intend to submit certain categories of disputes to arbitration while resolving others through different mechanisms—for example, referring technical disputes to expert determination and all other disputes to an arbitral tribunal. In such cases, the arbitration clause must precisely identify the types of disputes subject to arbitration and clearly regulate how the various dispute resolution mechanisms interact.
Preconditions to Arbitration
Contracting parties often seek, before resorting to formal dispute resolution mechanisms, to mitigate tensions and preserve their professional relationship by committing to dialogue and good-faith efforts to resolve disputes amicably. Such measures, undertaken before a dispute is referred to arbitration, are commonly called preconditions to arbitration and are typically stipulated in the contract’s arbitration clause.
Preconditions to arbitration may consist solely of negotiations between the parties to the dispute, whether conducted by their respective legal teams or by duly authorized representatives acting on behalf of each party. In some cases, negotiations may be limited to the parties’ senior management. Another precondition to arbitration is the requirement to obtain an opinion or determination from a qualified expert on the subject matter of the dispute, a mechanism frequently provided for in technical contracts.
Preconditions to arbitration—which may be structured as single- or multi-tier processes—constitute the initial step in referring a dispute to arbitration.
Seat of Arbitration
The seat of arbitration, which is typically designated in arbitration agreements by reference to a specific city, determines the law governing the procedural aspects of the arbitration, including the scope of the arbitrators’ powers and the grounds for challenging or setting aside an arbitral award. The law of the seat of arbitration also defines the extent to which national courts may intervene in the arbitral process.
For this reason, it is essential, to the extent possible, to select the seat of arbitration with due regard to the degree to which the legal system of the chosen jurisdiction is supportive of and receptive to arbitration. An alternative approach, aimed at safeguarding the parties’ rights, is to entrust the determination of the seat of arbitration to the agreed arbitral institution, which can make such a determination in light of the interests of the arbitration and the subject matter of the dispute.
Arbitral Tribunal
The parties’ appointment of the arbitrator or arbitral tribunal is one of the limited stages in the arbitration process during which they are afforded a degree of discretion. In such cases, each party typically seeks to appoint an arbitrator who is both experienced and well-versed in the dispute’s complexities. Accordingly, arbitration clauses commonly provide for the number of arbitrators and the method of their appointment.
Nevertheless, it is generally not advisable to specify particular personal characteristics for arbitrators, or to name specific individuals, within the arbitration clause of a contract—especially prior to the emergence of any dispute. Such drafting reduces flexibility and may result in undue limitations on the parties’ ability to select suitable arbitrators.
Requirement to Obtain an Expert Opinion
In contracts containing arbitration clauses, it is common practice to provide for the obtaining of an expert opinion on technical matters. However, the inclusion of such a requirement raises several important considerations, some of which should be carefully assessed during the drafting of the arbitration clause.
First, the binding nature of an expert’s opinion upon the parties and the arbitral tribunal applies only where this effect has been expressly stipulated in the contract. In the absence of such an explicit provision, the expert opinion merely serves as persuasive or indicative guidance for the arbitrators and does not carry binding force. The parties may also agree to grant the arbitral tribunal only limited authority to review or assess the expert determination. In such circumstances, clearly defining the scope of the expert’s mandate in the contract helps prevent overlap between the arbitral tribunal’s jurisdiction and the panel of experts’ jurisdiction. In general, the extent to which arbitrators are required to follow an expert opinion is a matter that must be given due consideration in contract drafting, particularly in the formulation of the arbitration clause.
The drafting of contracts—especially the formulation of arbitration clauses—constitutes a specialized legal task. A lack of familiarity with the potential risks inherent in arbitration proceedings may render the dispute resolution process more complex, time-consuming, and costly. Nevertheless, choosing arbitration as an alternative to state courts offers contracting parties a faster, more streamlined path to dispute resolution while reducing the risk of disproportionate or non-specialized judgments. With respect to anticipating and addressing potential obstacles and challenges along this path, the contracts team and arbitration team of Karimi & Associates Law Firm, together with experienced legal counsel, stand alongside you to minimize the risk of potential losses in the conclusion of contracts.