Arbitration clauses have four essential purposes. They have to:
- produce mandatory consequences for the parties;
- exclude the intervention of state courts in the settlement of disputes likely to arise between the parties,
- give the arbitrators the powers necessary to resolve the disputes; and
- permit a procedure which leads, under the best conditions of efficiency and rapidity, to the rendering of an enforceable award.
A former Secretary General of the ICC International Court of Arbitration, Frederic Eisemann, had coined the term clauses pathologiques in 1974. A “pathological arbitration clause” fails to achieve any of the purposes above.
So what’s wrong with these clauses? Apart from being incoherent, confusing to interpret, and often plain baffling, these clauses are likely to end up in court, very much contrary to the original intention of the parties to avoid a long and drawn out public battle in the courts and have a speedy, efficient, and private resolution of their disputes.
Remember, being “pathological” does not always mean the clause is unenforceable. Where they can, courts try and make sense of, and give meaning to these clauses and enforce them. All these clauses however, have caused much confusion and delay, and often defeated the purposes of efficiency, speed, and privacy.
So how do we ensure we don’t have a pathological clause on our hands?
Rule Number 1 – Don’t be inconsistent. Look at these two clauses. Both are found in the same contract – an insurance policy).
“7. Law and Jurisdiction
It is agreed that this Policy will be governed exclusively by the laws of Brazil. Any disputes arising under, out of or in connection with this Policy shall be subject to the exclusive jurisdiction of the courts of Brazil.
In case the Insured and the Insurer(s) shall fail to agree as to the amount to be paid under this Policy through mediation as above, such dispute shall then be referred to arbitration under ARIAS Arbitration Rules….
The seat of the arbitration shall be London, England.”
How do you read these two clauses together? One clause makes disputes arising under the contract subject to court litigation in Brazil. Another wants disputes to be referred to arbitration under the ARIAS Arbitration Rules. No other clause in the contract gave any indication as to which should take precedence.
You can’t read them together. They are blatantly contradictory. Justice Cooke agreed.
When faced with these two clauses in the High Court, the only reason he ultimately upheld the arbitration clause (overriding the exclusive jurisdiction language in clause 7) is because of the strong English policy in favour of arbitration. He adopted a very liberal approach to the words chosen by the parties in their arbitration clause and held that the parties, as rational businessmen, must have intended to have arbitration as the sole dispute resolution mechanism for all disputes arising under their policies.
However, it is unlikely that any policy in favour of arbitration is likely to save such pathological clauses in other jurisdictions. It would in all likelihood be held to be void for uncertainty.
So don’t draft inconsistent, pathological arbitration clauses and hope for the courts to save you. If your clients want arbitration, draft watertight and consistent arbitration and governing law clauses and ensure they never have to go to court on account of your bad drafting.
(Sindhu Sivakumar is a member of the faculty on myLaw.net.)