Arbitration clauses often appear as just a few lines in a commercial contract. Yet those few lines determine how disputes will be resolved if things go wrong. A poorly drafted clause can create confusion, delay proceedings, or even render arbitration ineffective.
When drafting an arbitration agreement, certain elements must be carefully considered to ensure that the clause works as intended. Here are ten key things every well-drafted arbitration agreement should address.
1. Clearly State That Disputes Will Be Resolved by Arbitration
The agreement must expressly state that disputes will be resolved through arbitration.
This may sound obvious, but disputes sometimes arise where parties refer disagreements to an institution without clearly stating that arbitration is the chosen method. Institutions like the International Chamber of Commerce offer several dispute resolution mechanisms, including conciliation and expert determination, not just arbitration.
To avoid ambiguity, the clause should clearly state that disputes shall be resolved by arbitration.
2. Make It Clear That the Award Is Final and Binding
Most arbitration clauses specify that the tribunal’s award will be “final and binding.”
This signals that the decision will conclusively resolve the dispute and can be enforced by courts against the losing party. It also reflects the parties’ intention that courts should not review the merits of the tribunal’s decision.
Many institutional rules, such as those of the London Court of International Arbitration, also provide that arbitral awards are binding on the parties.
3. Draft the Clause Broadly Enough to Cover All Disputes
The scope of the arbitration clause determines which disputes can be referred to arbitration.
If the clause is drafted too narrowly, certain disputes may fall outside the tribunal’s authority. This can create jurisdictional challenges and may even lead to an award being set aside under instruments like the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
For this reason, arbitration clauses are usually drafted broadly using phrases such as “arising out of,” “in connection with,” or “relating to” the contract.
4. Use Mandatory Language
The wording of the clause must show that arbitration is compulsory, not optional.
Words like “shall” should be used instead of permissive terms like “may.” A clause stating that disputes may be referred to arbitration leaves room for argument about whether arbitration is actually required.
Clear and mandatory wording helps avoid disputes about the parties’ obligations.
5. Decide Between Institutional and Ad Hoc Arbitration
Parties must decide whether their arbitration will be administered by an institution or conducted on an ad hoc basis.
Institutional arbitration is managed by organisations such as the International Chamber of Commerce or the London Court of International Arbitration, which provide established rules and administrative support.
Ad hoc arbitration, on the other hand, is conducted without institutional administration and requires the parties to provide more detailed procedures in the agreement itself.
6. Specify the Number and Appointment of Arbitrators
The arbitration agreement should state how many arbitrators will decide the dispute and how they will be appointed.
In practice, the number of arbitrators must be odd to prevent deadlock. Major international disputes often use a panel of three arbitrators, while smaller disputes may be handled by a single arbitrator to reduce costs.
If the parties require arbitrators with particular qualifications or expertise, this can also be specified.
7. Identify the Seat of Arbitration
The agreement must specify the seat of arbitration, which is the legal home of the arbitration.
The seat determines the procedural law governing the arbitration and the courts that have supervisory jurisdiction over the process. It is therefore one of the most important decisions in drafting the clause.
Importantly, the seat is different from the venue, which simply refers to the physical location where hearings take place.
8. Indicate the Governing Law
The contract should also specify the law governing the parties’ agreement and their disputes.
If the governing law of the arbitration agreement is unclear, courts may have to determine it. In Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb, the Supreme Court of the United Kingdom explained that where the parties have chosen a law to govern the main contract, that law will usually also govern the arbitration agreement unless there is evidence to the contrary.
Clarity on governing law reduces the risk of procedural disputes later.
9. Agree on the Language of the Arbitration
The arbitration agreement should state the language in which proceedings will be conducted.
This helps avoid delays and additional costs associated with translating documents or providing interpretation during hearings. Where the parties fail to specify a language, the tribunal will usually decide the issue.
10. Consider Including a Multi-Tier Dispute Resolution Clause
Some contracts include clauses requiring parties to attempt settlement before commencing arbitration.
These multi-tier clauses typically require parties to first attempt negotiation or mediation before referring the dispute to arbitration. They are designed to encourage amicable resolution and avoid lengthy arbitral proceedings.
Where such clauses are included, the agreement should clearly specify the steps involved and the timeline for each stage.
An arbitration clause may look simple on paper, but in practice it carries enormous practical consequences. Careful drafting ensures that arbitration remains efficient, predictable, and capable of resolving disputes without unnecessary procedural battles.
When it is properly drafted, the arbitration agreement becomes the foundation of an effective dispute resolution process rather than the source of further disputes.
