Arbitration Clauses in Commercial Contracts

Arbitration Clauses in Commercial Contracts

The commercial lawyers at Bahamas law firm ParrisWhittaker are experts in drawing up commercial contracts.  A recent ruling on the drafting of binding arbitration clauses is significant – with lessons to be learn for commercial organisations and their legal representatives.

In Kruppa v Benedetti  the UK’s High Court considered whether a clause in a commercial contract constituted an ‘arbitration agreement’ for the purposes of section 6(1) Arbitration Act 1996.  The clause read:

“Governing law and jurisdiction
Laws of England and Wales. In the event of any dispute between the parties pursuant to this Agreement, the parties will endeavour to first resolve the matter through Swiss arbitration. Should a resolution not be forthcoming the courts of England shall have non-exclusive jurisdiction.”

The defendants contended that the parties were required to arbitrate a dispute under the clause.   However, the court found that the parties envisaged the possibility of two stages: an attempt to resolve the matter through Swiss arbitration, followed by litigation in the English courts.  The courted ruled that an agreement that a party will ‘endeavour’ to first resolve the matter through Swiss arbitration (as was the case here) involves something different from an agreement to refer a dispute to arbitration.   It was not, therefore, a binding agreement to refer a dispute to arbitration.

In addition, there was a lack of detail as to the nature of any future arbitration, including the number and identity of arbitrators, the qualifications of candidates for arbitration or the means by which they should be chosen.  This meant further agreement between the parties would be necessary - a further factor that helped render the clause unenforceable.

What can we learn from this?

As a result of this ruling, businesses and other commercial organisations considering commercial contracts, and their lawyers, need to carefully consider the wording of arbitration clauses to ensure it is clear and unequivocal.  In particular:

  • Arbitration clauses must be drafted with care to ensure they are mandatory if that is the intention of the parties.  Simply including the word ‘arbitration’ in a clause is insufficient to make the clause binding.
  • Where an arbitration clause refers to both arbitration and litigation, great care must to taken to ensure no conflict is created; or that a two stage process is effectively created which would render the arbitration clause unenforceable.  
  • As much information as possible should be included in the arbitration agreement regarding the specific details of any arbitration envisaged.  This is critical to ensure it does not require further agreement between the parties in order for it to be enforceable.
  • When considering the arbitration seat of choice, it is important to understand the legal requirements of the seat.

How can we help?

The commercial litigation lawyers at ParrisWhittaker are adept at drafting clear, unequivocal arbitration clauses to ensure there is no ambiguity should a dispute later arise.  If you are considering the terms of a business contract or are in the process of negotiating the terms, contact us now for experienced advice and representation.