Arbitration has become one of the most widely used methods for resolving commercial disputes around the world. Businesses, investors and even states often prefer it because it offers a private, flexible process for settling disputes outside the traditional court system.
At the centre of every arbitration process lies one essential element: the arbitration agreement. Without it, arbitration cannot take place. It is the legal foundation that gives arbitrators their authority and binds the parties to resolve their disputes through arbitration rather than litigation.
This article briefly explains what an arbitration agreement is, the forms it may take, and the key requirements for its recognition and enforcement under international arbitration law.
What Is an Arbitration Agreement?
An arbitration agreement is simply an agreement between parties that disputes between them will be resolved through arbitration instead of through the courts.
It represents the parties’ consent to submit their disputes to a private dispute resolution process. That consent is what empowers arbitrators to hear the dispute and make a binding determination.
In practice, an arbitration agreement may cover disputes that already exist between the parties or disputes that may arise in the future.
Arbitration agreements generally appear in two main forms.
The Arbitration Clause
The most common form is an arbitration clause contained in the main contract between the parties. Such a clause provides that if a dispute arises out of or in connection with the contract, the dispute will be resolved through arbitration.
This type of clause anticipates future disputes. By including it in their contract, the parties agree in advance that any disagreement arising from their relationship will be determined through arbitration rather than through court proceedings.
The Submission Agreement
The second form arises after a dispute has already occurred. In this situation, the parties enter into a separate agreement submitting the existing dispute to arbitration.
This is known as a submission agreement because the parties agree to submit a specific dispute to arbitrators for determination.
The “Midnight Clause” Phenomenon
Arbitration clauses are sometimes informally described as “midnight clauses.”
The expression reflects a common reality in commercial negotiations. Parties often spend most of their time negotiating substantive issues such as payment obligations, delivery timelines and performance standards. By the time they reach the dispute resolution clause, negotiations may be nearly complete.
As a result, the arbitration clause is sometimes inserted with little discussion. Yet when a dispute eventually arises, that seemingly minor provision becomes one of the most important parts of the entire contract.
Recognition in International Law
The significance of arbitration agreements has long been recognised in international law. One of the earliest instruments addressing their recognition was the Geneva Protocol on Arbitration Clauses of 1923, which dealt with the recognition and enforcement of arbitration agreements.
Today, the most influential framework is the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Article II of the Convention requires contracting states to recognise written arbitration agreements and, where such agreements exist, to refer the parties to arbitration.
Modern arbitration legislation in many jurisdictions is also influenced by the UNCITRAL Model Law on International Commercial Arbitration, which provides a widely adopted framework for the conduct of international arbitration.
Key Requirements for Recognition and Enforcement
For an arbitration agreement to be recognised and enforced, several conditions must generally be satisfied.
First, the agreement must be in writing.
Writing may take different forms. It may appear as an arbitration clause within a contract, a separate submission agreement, or even an exchange of correspondence between the parties. The New York Convention recognises exchanges of letters or telegrams as sufficient evidence of a written agreement, while the UNCITRAL Model Law adopts an even broader approach, treating any communication that provides a permanent record of the agreement as writing.
Second, the agreement must relate to existing or future disputes.
An arbitration agreement must concern disputes between the parties, whether those disputes already exist or may arise later. Arbitration clauses generally deal with future disputes, while submission agreements address disputes that have already arisen.
Third, the dispute must arise from a defined legal relationship.
In most cases, the relationship between the parties will be contractual, such as a sales agreement, construction contract or investment arrangement. However, the relationship need not always be contractual, provided it constitutes a legally recognised relationship between the parties.
Fourth, the subject matter of the dispute must be capable of settlement by arbitration.
Not all disputes can be resolved through arbitration. Certain matters are reserved for national courts because of public policy considerations. Under the New York Convention, recognition or enforcement of an arbitral award may be refused if the subject matter of the dispute is not capable of settlement by arbitration under the law of the relevant state.
Fifth, the parties must have legal capacity.
The parties entering into the arbitration agreement must have the legal capacity to do so. Article II(3) of the New York Convention requires courts to refer parties to arbitration unless the agreement is found to be null and void, inoperative or incapable of being performed. One circumstance that may invalidate the agreement is where a party lacked legal capacity under the applicable law.
Finally, the agreement must be legally valid.
Like any contract, an arbitration agreement must be free from defects such as fraud, duress or misrepresentation. Where such vitiating factors are present, the agreement may be considered invalid and therefore unenforceable. The validity of the agreement is typically assessed under the law chosen by the parties or, in the absence of such choice, under the law of the place where the arbitral award is made.
The arbitration agreement is the cornerstone of the arbitration process. It is the instrument through which parties express their willingness to resolve disputes outside the courts and the source of the arbitrators’ authority.
Because of its importance, international instruments such as the New York Convention and the UNCITRAL Model Law place strong emphasis on recognising and enforcing valid arbitration agreements.
To businesses and contracting parties, the dispute resolution clause in a contract deserves just as much attention as the commercial terms. A carefully drafted arbitration agreement can significantly influence how efficiently and fairly disputes are ultimately resolved.
