Arbitration is “a method of dispute resolution involving one or more
neutral third parties who are usually agreed to by the disputing parties and
whose decision is binding” (as defined by Black’s Law Dictionary 119,9th ed. 2009)
. It is a form of alternative dispute
resolution (ADR), a technique for the resolution of disputes outside the
courts. Arbitration has become very important in the business world and
certainly a common feature in international and domestic commercial
transactions. It is therefore not unusual to find an arbitration clause in most
commercial agreements as a key component of how disputes are to be resolved.
The purpose of an arbitration clause
was well enunciated in the case of
where the learned judge
stated that:

“Arbitration Clause is intended
to save both parties the time and expense of a lawsuit. Other notable reasons
are that it may lessen the risk of punitive damages awards, may decrease
exposure to class actions or other forms of aggregate litigation, may result in
more accurate outcomes because of arbitrator expertise and incentives, may
better protect confidential information from disclosure, enhance the ability of
the parties to have their disputes resolved using trade rules and it may enable
the parties to better preserve their relationship. It may also provide a
neutral forum”. The judge went further to state the effect of including an
arbitration clause in an agreement thus: “If the contract contains an
arbitration clause stating that either party to the contract may choose
arbitration instead of litigation, it may not matter that the word
“may” was used to try and make arbitration optional instead of
mandatory. It is established that in approaching the question of construction
it was necessary to inquire into the purpose of the arbitration clause. In
choosing arbitration the parties showed an intention to have their disputes
decided by an arbitrator which they had chosen.” Per ORJI-ABADUA, J.C.A.
(Pp. 32-33, paras. E-C).
Credits –
For parties to have an effective means
of resolving their disputes in an arbitration proceeding, the arbitration
clause of the contract is very important. In drafting the clause, careful
thought needs to be given to its contents and the following are some of the
things to consider.
How to commence the arbitration
Arbitration clause
should specify how the arbitration is to be commenced, notice to be given and
who and how such is to be given.
of arbitration
seat is the place or venue the arbitration is to be held. The arbitration
clause should state the seat. The seat chosen will determine the applicable
procedural rule that will govern the arbitration. The procedural rule of the
country in which the seat is situated will apply. It is therefore important to
give careful thought to this before making a choice. The attitude and support
provided by the domestic courts need to be considered too. Also, important is
the enforceability of an arbitral award is the seat chosen. For enforcement
purpose, it is important that the country is a party to the New York Convention
on enforcement of arbitral awards, before that convention can apply.
Number and method of
appointing the arbitrators
is important to specify the number and state the method of appointing the
arbitrators. Most arbitral tribunals have one or three arbitrators, though
there is nothing stating different number of members cannot be appointed.
Oftentimes, the value and complexity of the contract determine the number of
arbitrators to specify. The clause should also specify method of replacement,
which may be required due to death, resignation, removal, and illness of an
arbitrator or for any other compelling reason.
of arbitration
is always good practice to specify the language of the arbitration. This will
also help in choice of arbitrators that are comfortable with that language and
help in avoiding cost of translation.
of Arbitration
clause will need to make clear whether it is an institutional arbitration or an
adhoc one. Institutional arbitrations are administered and supervised by
recognized arbitral institution such as the ICC.
law governing the subject of the dispute, sometimes termed the substantive law
has to be specified. The parties should decide on the law they wish to apply to
any dispute that arises and the tribunal will apply that law to the merits of
the dispute. This may not necessarily be stated as part of the arbitration
clause, but it is helpful to still state it somewhere in the contract as it
helps the arbitrators to determine which law applies to the subject-matter of
the dispute.
ability to
resolve disputes in a neutral forum and the enforceability of binding decisions
are often cited as the main advantage of arbitration. The principal instrument
governing the enforcement of commercial international arbitration agreement
awards is the “United Nations Convention
on the Recognition and Enforcement of Foreign Arbitral Awards of 1958”(New York
which has been ratified by more than 140 countries, including
most countries involved in significant international trade and economic
transactions. For example, United States of America, United Kingdom, Canada are
all signatories to the New York
(with notable exceptions like Iraq, which, not
having ratified the New York Convention, cannot be assumed to give effect to
arbitration decisions rendered in other countries)
. The convention requires the states
that have ratified it to recognize and enforce international arbitration
agreement and foreign arbitral awards issued in other contracting states. As a
practical matter, what that means is that an international award originating in
a country that is a party to the New York Convention may be enforced in any
other country that is also a signatory as if such were actually rendered by the
domestic courts in that second country. Nigeria is a signatory to the New York
convention. Local legislations have also given confidence to the use of
arbitration to settle disputes instead of loading our ever busy courts with
disputes that can be resolved alternatively.
for Purpose
: Resolution of
disputes in the ordinary courts is subject to the rules of the court and is
administered by judges appointed by the state. Litigants have little input into
how those judges are appointed, the rules governing their procedure, the venue of
the trial, those who can attend the proceedings, and other things involved in
the administration of justice. On the other hand, the flexibility of
arbitration, which allows parties to make substantial input into arbitration
proceeding, makes it a more attractive proposition, especially in commercial
transactions. Parties appoint their arbitrators, determine the rules, decide on
the fees of the arbitrators and do many more to make it fit for purpose. It is
usually simpler, more efficient, and more flexible for scheduling than
Because the parties in an arbitration are
usually encouraged to participate fully and sometimes even to help structure
the resolution, they are often more likely to work together peaceably rather
than escalate their anger and hostility towards one another, during and after
the arbitration, as is often the case in litigation.
Professional: Parties to arbitration are at
liberty to appoint arbitrators who are experts and professionals in the subject
matter of the dispute. This is very important in any business environment as
those appointed understand the issues at stake better and are at a better
position to reach a quick and more acceptable decision to the satisfaction of
parties. Arbitration is not hamstrung by strict adherence
to the sometimes time consuming and confusing rules of evidence and procedures.
rules of evidence and procedure:
often-convoluted rules of evidence and procedure do not apply in arbitration
proceedings, making them less stilted and more easily adapted to the needs of
those involved. Importantly, arbitration dispenses with the procedure called
discovery that involves taking and answering interrogatories, depositions, and
requests to produce documents – often derided as a delaying and game-playing
tactic of litigation. In arbitrations, most matters, such as who will be called
as a witness and what documents must be produced, are handled with a simple
phone call.
than litigation:
Arbitration is faster. This is because
decisions are reached quicker without any preliminary objection or unnecessary
appeal. There have been instances in the regular courts where preliminary
matters alone can take up years before the substantive matter is heard.
Arbitration proceedings are generally held in private.
This is important in most corporate
and business cultures.
parties sometimes agree to keep the proceedings and terms of the final
resolution confidential. Both of these safeguards can be a boon if the subject
matter of the dispute might cause some embarrassment or reveal private
information, such as a company’s client list or trade secret.
An arbitration based on a well thought
out arbitration clause is more likely to result in timely justice than court
litigation. In the mind of business people, most legal disputes are cost
centers and the sooner they end the better. Further, as the public justice
system of large metropolitan areas continue to be cash strapped and forced to
reduce employee and services thereby lengthening the time it takes to get to
trial, more businesses will opt out for private justice system of arbitration
and mediation.
Business is all about managing towards
an objective, i.e. profitability, and that includes reducing uncertainty caused
by delays. A business wants disputes resolved reasonably quickly and wishes the
resolution of disputes to cause as little disruption to its core business and
employees as possible. Failure to incorporate a business-oriented arbitration
clause leaves too many decisions up to parties mired in the midst of dispute.
It is better to create the framework for dispute resolution when the parties
are at the beginning of a contract. A good arbitration clause can foster timely
Feranmi Akinluyi.