An arbitration clause (or arbitration agreement) is the mechanism through which the parties agree to resolve their disputes using arbitration. Without an arbitration clause in the relevant contract, the default position is that disputes will be referred to litigation through a court procedure.
However, there is more to an arbitration clause than simply stating “the parties agree to refer all disputes to arbitration.”
In this article, we look at the problems with defective arbitration clauses, and how to avoid common issues.
Why arbitration clauses matter
Badly-drafted arbitration clauses carry unnecessary risks.
For example, the parties can end up in satellite litigation over the meaning of the arbitration clause, escalating costs and delay before the substantive dispute has even begun.
If it’s too uncertain, the arbitration clause will fail to bind the parties to an agreement to arbitrate at all. One party could legitimately start a court process on their home turf instead.
Possibly a worse outcome is that the parties complete the arbitration procedure, but the losing party challenges the award on the basis that the arbitration clause was invalid.
If the parties are sure that they want to arbitrate their disputes, which is often the case in cross-border relationships, then it is imperative that the arbitration clause is correct and unambiguous.
What makes an arbitration clause legally effective?
A good arbitration agreement:
- Contains an unequivocal obligation to submit clearly defined disputes for final and binding resolution by arbitration.
- Specifies the seat (or legal place) of the arbitration.
- Specifies the law governing the arbitration agreement.
- Addresses the number of, and appointment mechanism for the arbitrator(s).
- Specifies the law applicable to the dispute.
- States whether, and if so which, arbitral rules apply.
This sound like a long list of technical points. But arbitration clauses do not need to be complex to be effective. In fact, simple, concise clauses are more likely to be enforceable.
For example, the International Chamber of Commerce (ICC) model clause simply states:
"All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules."
Common problem: ambiguous or incomplete arbitration clauses
A common problem with arbitration clauses is the use of vague wording. That could result in the clause lacking procedural detail, or there may be no clear intention to arbitrate.
For example, this arbitration clause was considered in Arab-African Energy Corp Ltd v Olieprodukten Nederland BV [1983] 2 Lloyd's Rep 419:
"English law – arbitration, if any, London according ICC Rules”
It was decided that the clause did not impose a clear obligation to arbitrate disputes. The words “if any” made it too ambiguous.
Similarly, this clause (in another case) was too ambiguous, for different reasons:
"Any dispute shall be solved by arbitration, but if the parties do not agree on the award, the Tribunal of Tunis shall be competent."
It cannot be said that this clause imposes a clear and unequivocal obligation to arbitrate. The problem is that the parties are required to "agree on the award." But this is not possible in arbitration. The arbitration award is binding on the parties, whether or not they have "agreed on" it.
Where the parties have agreed to arbitrate pursuant to institutional rules, best practice is to use the model clause of that institution.
Common problem: unclear seat, governing law, or rules
One of the hallmarks of a good arbitration agreement is identifying the seat of the arbitration.
The seat (or place) determines the procedural law and the courts with supervisory jurisdiction. Popular seats are London, Paris, or Singapore.
However, if there is ambiguity over the seat, or the parties fail to specify the seat at all, this could render an arbitration clause ineffective.
For example, the following clause is unclear:
"Any dispute arising under this contract shall be resolved by arbitration at the ICC of Geneva."
It appears that parties intend to refer disputes to ICC arbitration, with a seat in Geneva. However, the ICC is based in Paris. The “ICC of Geneva” does not exist.
In a similar vein:
"Arbitration at local chamber of commerce".
It is unclear what “local” means. Is it local to the parties? Which one? Or does it mean local to the subject matter of the contract, or the dispute?
In some cases, the parties have specified a seat, but have failed to specify a governing law for the arbitration. In the UK, the Arbitration Act 2025 has added some clarity to these situations.
The Arbitration Act 2025 inserts a new section 6A into the Arbitration Act 1996, so that the law of the arbitration agreement will be the law of the seat (unless the parties agree otherwise).
Common problem: “Hybrid” or conflicting dispute resolution clauses
Some contracts contain complex dispute resolution clauses that include an arbitration agreement, among other mechanisms.
Multi-tiered clauses
Generally, multi-tiered clauses are permissible, so long as they are sufficiently clear. A multi-tiered clause is where parties may agree attempt a non-binding procedure (or procedures) before they move to a chosen binding forum for the dispute.
Popular non-binding procedures include negotiation, mediation, or early neutral evaluation for example, before the parties attempt arbitration.
There should be clear trigger points for each stage of the process so that the parties understand when one resolution process will end, and another will begin.
Carve out clauses
The clauses that tend to cause more problems are those that try to split disputes between arbitration, litigation, and expert determination. All are binding forms of resolution.
This can work if there is likely to be significant diversity in the types of dispute that may arise under a contract. The parties will need to define the disputes precisely so that it is clear which disputes are intended for which forum.
Clauses like the following are not sufficiently certain:
"In case of dispute the parties undertake to submit to arbitration, but in case of litigation the Tribunal de la Seine shall have exclusive jurisdiction".
It is unclear from this clause whether the parties are obliged to arbitrate or not.
Hybrid clauses
Hybrid clauses give one or both parties the right to choose between arbitration and litigation, so that they may select the forum that best suits the circumstances of the particular dispute.
However, these types of clause can cause serious problems. Once a dispute is envisaged, the parties may end up in a race to secure a forum. One party may issue proceedings in their local court, while the other issues a notice of arbitration. This can lead to complex and costly parallel proceedings, and expensive anti-suit injunctions.
For those reasons, hybrid clauses like this should be avoided if possible.
Common Problem: Poorly drafted multi-party or multi-contract clauses
It is a defining feature of arbitration that it is a consensual process. Parties must agree to submit their disputes to arbitration.
So when it comes to multi-party disputes, this can become a challenge. The arbitration framework will need to provide a mechanism to join third parties to arbitral proceeding, where it is likely that disputes will involve several parties.
For instance, Article 22.1 (x) of the LCIA Rules 2020 allows one or more third persons to be joined in the arbitration as a party. The ICC Rules 2021 also allow a joinder under Article 7, but the joinder may only take place before the tribunal has been constituted, unless all parties (including the third party) agree otherwise.
Often this ‘consent by all parties’ approach is adopted in arbitral rules.
If there is no mechanism for joining third parties, or for allowing related disputes to be resolved together, this can lead to parallel proceedings and inconsistent awards.
Parties should therefore choose rules which allow for joinders, a consolidation process and concurrent hearings (such as the ICC or LCIA). These mechanisms address issues that arise with multi-party disputes.
How to avoid problems when drafting arbitration clauses
The best arbitration clauses are short and simple. Standardised wording is available from the arbitration institutions, which offer model clauses which drafters can insert into their contracts, or amend as appropriate.
It is best practice to make your arbitration clauses consistent throughout all of your contracts. In complex, multi-party disputes, this will help avoid escalating costs and make it easier for references to be heard together.
Reviewing and fixing existing arbitration clauses
As an exercise in good practice, businesses should audit their contracts regularly to check that the dispute resolution clauses are clear and consistent.
Don’t wait until a dispute arises to fix underlying problems. Proactive parties that seek to amend or clarify clauses will save time and costs later down the line.
