The more “catch-all” the reference, the better

SindhuSivakumar_DraftingForArbitrationDispute resolution clauses, including arbitration clauses, are often called “midnight clauses”, because parties and their counsel have a tendency to treat these clauses as “boilerplate”, leaving their negotiation and drafting to the absolute last minute. Rarely is attention paid to the precision of the language used. In fact, many clauses  — for instance, “English law – arbitration, if any, London according ICC Rules” — are not even complete sentences. As we will explore in this post, this can sometimes have unintended consequences for the parties.

The language used tends to vary widely in relation to the scope of reference in the arbitration clause. Even the model arbitration clauses provided by the different arbitral institutions are not consistent.

For example, the London Court of International Arbitration (“LCIA”) model clause prefers the language: “Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.”

On the other hand, the International Chamber of Commerce (“ICC”) recommended clause reads: “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.

Some arbitration clauses will contain language that is even simpler than this: “All disputes arising under this agreement shall be referred to arbitration.”

Does the language you use matter? Generally speaking, the answer is ‘No’. Most Model Law jurisdictions follow a pro-arbitration policy of giving effect to arbitration clauses unless the language makes it almost impossible to do so, as was the case with the Sulamerica clauses.


That said, there are several cases where the courts have been more semantic in their approach. For example, in one case, the language “arising under” was said to signify a narrower reference than “arising out of” (Heyman v. Darwins Ltd., [1942] AC 356).  In another (Overseas Union Insurance Ltd. v. AA Mutual International Insurance Co. Ltd., [1988] 2 Lloyd’s Rep 63), the words “arising under a contract” were not considered wide enough to include disputes in relation to the validity of the contract itself, such as a misrepresentation claims. In order to include such disputes within the scope of reference, language like “in relation to” or “in connection with” was held to be required.

However, these decisions were much criticised by Lord Hoffman of the House of Lords in Fiona Trust and Holding Corp. v. Privalov, [2008] 1 Lloyd’s Rep. 254 (H.L.). He said:

…in my opinion the distinctions which they [the cases we referred to] make reflect no credit upon English commercial law. It may be a great disappointment to the judges who explained so carefully the effects of the various linguistic nuances if they could learn that the draftsman… regarded the expressions “arising under this charter”…and “arisen out of this charter”… as mutually interchangeable. … the time has come to draw a line under the authorities to date and make a fresh start…

Courts, Lord Hoffman recommended, need to “…give effect to the reasonable commercial expectations of the parties about the questions which they intended to be decided by arbitration….”

This approach will find favour in most modern courts, including in India. See, for example, the decision of the Andhra Pradesh High Court in M/s. Krebs Biochemicals v. Nannapaneni Venkatrao (July 6, 2009).

From a drafting perspective, the lesson one takes away is this — be as wide as possible with the language of the scope of the reference in your arbitration clause; the more “catch-all” it is, the better. That said, the mere fact that you don’t include the words “in connection with” or “in relation to” or “including any question regarding its existence, validity or termination” should not be fatal. In all likelihood, your clause will still be held to cover issues such as the validity of the agreement.

(Sindhu Sivakumar is a member of the faculty on


“Agreement in writing” and the formal validity of arbitration agreements

SindhuSivakumar_DraftingForArbitrationMost jurisdictions require arbitration agreements to be in writing if they are to be recognised. Article II of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“the New York Convention”), Article 7 of the original UNCITRAL Model Law on International Commercial Arbitration (1985) before it was amended in 2006 (“the 1985 Model Law”), and Section 7 of India’s Arbitration and Conciliation Act, 1996 (“the Indian Act”), all contain this requirement.

We know that there are different ways of entering into contracts — including electronically, by reference to other documents, and orally. Sweden and Norway could not find any rational basis for treating arbitration agreements any differently. Article 1 of the Swedish Arbitration Act and Articles 3 to 10 of the Norwegian Arbitration Act recognise any kind of agreement through which the parties have reached a consensus to arbitrate. The 2006 version of the UNCITRAL Model Law on International Commercial Arbitration (“the 2006 Model Law”), in Article 7, allows states to abolish all formal requirements of validity. Some states, like England, have taken a halfway house approach. While requiring the arbitration agreement to be in writing, they also allow that requirement to be met quite easily.

The recent Bombay High Court decision in Mody v. Kerwala (September 19, 2013) is in contrast to this approach. The Court held that not only must an arbitration agreement be in writing according to Section 7(3) of the Indian Act, the fact that the agreement is in writing can only be proved as specified in Section 7(4) of the Act.

Without debating the relative merits of the strict “in writing” approach, let us look at the enforcement issues that arise from the multiplicity of legal approaches on this point.

Written_arbitration_agreement_validityjpgConsider Part II of the Indian Act, which gives effect to India’s obligations under the New York Convention. Section 44 of the Indian Act defines a “foreign award” as an award made in a New York Convention signatory state (and notified by the Central Government as fulfilling the reciprocity requirement), and made pursuant to an agreement in writing. Every other provision in Part II, including an Indian court’s obligation to refer stay proceedings brought in breach of foreign-seated arbitration agreements (Section 45), its obligation to recognise a foreign award as final and binding (Section 46), and its obligation to enforce and execute the award (Sections 47 to 49), is contingent on the award being a “foreign award” under Section 44, that is, made pursuant to an agreement in writing.

So, would an award made pursuant to an oral agreement in say Sweden (a country notified by the Central Government), be a “foreign award” under Section 44? Can it be enforced in India? How would it satisfy Section 47’s evidentiary requirement of producing the original arbitration agreement for enforcement?

Chances are, an Indian court will not enforce such an award. It has no reason to, considering the scheme of Part II and the New York Convention. The same goes for other NY Convention signatories. There is an inherent discrepancy in the New York Convention approach and the approach endorsed in the 2006 UNCITRAL Model Law that states like Norway and Sweden follow.

However this is resolved at the national and international level, the drafting lesson here is very clear. Always ensure that your arbitration agreement is valid under the law of the seat, the law applicable to the arbitration agreement (which should always be specified), as well as the law at the place of enforcement. Otherwise, there is a very real danger that your award might not be enforceable, even if your agreement and award are perfectly valid at your seat.

(Sindhu Sivakumar is part of the faculty on


Always specify the law governing the arbitration agreement

SindhuSivakumar_DraftingForArbitrationI had referred to the Sulamerica decision a couple of weeks ago in the context of inconsistency in drafting arbitration agreements. There, the contract in question contained both an exclusive jurisdiction clause (to the courts in Brazil) as well as arbitration clauses referring disputes to arbitration in London. While the inconsistency issue was resolved (in favour of the arbitration agreement) in the High Court itself, the Court of Appeal had to be brought in to decide another critical question — what was the proper law of the arbitration agreement in the absence of an express choice by the parties?

Most of us know that as a consequence of the doctrine of separability, the law governing the arbitration agreement need not be the same as either the governing law of the contract or the law of the seat of arbitration. Most of us also know the importance of the law governing the arbitration agreement – it decides issues concerning the scope, validity, and interpretation of the arbitration agreement.

Drafting-and-Reviewing-Comm-Contracts-Ad-2In spite of its importance however, arbitration clauses rarely specify the law governing the arbitration agreement. Even though they should. This is especially so because courts in different jurisdictions have not been consistent at all on how to decide, in the absence of an express choice made by the parties, which law governs the arbitration agreement.

The governing law (of the contract) approach

Older English decisions had held that in the absence of an express choice made by the parties, the law governing the arbitration clause would follow the governing law of the underlying contract. It was implied, they felt, that the parties intended for their express choice of governing law to also govern the arbitration clause.

Indian decisions also followed this approach (see the Supreme Court’s decision in N.T.P.C. v Singer (1994). Only where the parties did not specify either the governing law of the contract or the law governing the arbitration agreement would a presumption arise that the latter follows the law of the seat of arbitration.

The law of the seat approach

Recent English decisions (such as C v. D, [2007] EWCA Civ 1282) however, seem to favour the objective “closest and most real connection” test in deciding the proper law of the arbitration agreement, which invariably leads to the law of the seat of arbitration.

In Sulamerica, the governing law of the insurance policy was Brazilian law while the arbitration was English-seated. The law governing the arbitration agreement was not specified. The High Court, following other recent English decisions, held that the proper law of the arbitration agreement was English law because it had its closest and most real connection with the law of the seat.

This decision was appealed on the ground that the High Court judge should have held that the parties had made an implied choice of Brazilian law as the proper law of the arbitration agreement (following their express choice of Brazilian law as the governing law of the contract).

The Court of Appeal dismissed the appeal.  Lord Justice Moore-Bick stated that the proper law was to be determined by undertaking a three-stage enquiry.

The test

ProperLaw_ArbitrationAgreement_LordJusticeMoore-Brick_SulamericaFirst, look into the express choice of the parties, if any. If this did not exist, then the courts should turn to the implied choice of the parties, and if this could not be determined, the courts should determine the system of law with which the arbitration agreement had its “closest and most real connection”.

No implied choice

There was no express party choice in Sulamerica, so Lord Justice Moore-Bick went on to consider the implied choice of the parties. He said that “in the absence of any indication to the contrary”, an express choice of law governing the substantive contract was a strong indication that implied the choice of the same law in relation to the agreement to arbitrate; unless of course “there are other factors present which point to a different conclusion.”

Two important factors in this case indicated that the parties had not impliedly chosen Brazilian law to govern the arbitration agreement. The first was the choice of London as the seat, and second was the fact that a choice of Brazilian law meant that the arbitration agreement was enforceable only with the insured’s consent (which, according to the court, the parties could not have intended!).

Law of the seat has the closest and most real connection to the arbitration agreement

Because there was no express or implied choice of the law governing the arbitration agreement, he then went on to consider which system of law the arbitration agreement had the closest and most real connection. The court determined that the arbitration clause had its closest and most real connection with the law of the seat, that is, English law.

It is interesting to note Lord Justice Moore-Bick’s words in this regard. You may disagree with this assessment, but to me, it almost seems as if once the enquiry proceeds to the third stage, it will be the law of the seat that will almost always have the closest connection to the arbitration agreement.

… No doubt the arbitration agreement has a close and real connection with the contract of which it forms part, but its nature and purpose are very different. In my view an agreement to resolve disputes by arbitration in London, and therefore in accordance with English arbitral law, does not have a close juridical connection with the system of law governing the policy of insurance, whose purpose is unrelated to that of dispute resolution; rather, it has its closest and most real connection with the law of the place where the arbitration is to be held and which will exercise the supporting and supervisory jurisdiction necessary to ensure that the procedure is effective. Its closest and most real connection is with English law. I therefore agree with the judge that the arbitration agreement is governed by English law.”

Lord Neuberger’s observations – back to the High Court’s approach?

In Sulamerica, Lord Neuberger agreed with Lord Justice Moore-Bick’s three-stage enquiry. However, while referring to C v. D, he added the following observations:

….there are a number of cases which support the contention that it is rare for the law of the arbitration to be that of the seat of the arbitration rather than that of the chosen contractual law, as the arbitration clause is part of the contract, but …the most recent authority is a decision of this court which contains clear dicta (albeit obiter) to the opposite effect, on the basis that the arbitration clause is severable from the rest of the contract and plainly has a very close connection with the law of the seat of the arbitration.

Again, you may disagree with this analysis, but it seems to me that he gives precedence to the ‘close connection’ test (over the parties’ implied choice) on the basis of the doctrine of separability (unlike Lord Justice Moore-Bick who resorted to the third step only because there was no implied choice).

Subsequent application of the three-step test

However, it is Lord Justice Moore-Bick’s three-step test that has been applied since Sulamerica. In Arsanovia Ltd v. Cruz City 1 Mauritius Holdings, [2012] EWHC 3702 (Comm), which involved Indian governing law and an English seat, Justice Andrew Smith (in the High Court) applied the three-step test and concluded that as a matter of contractual interpretation, the parties had demonstrated their mutual Arsanoviacase_arbitrationagreement_Indianlaw.jpgintention that the arbitration agreement be governed by the law of India. Because the judge was able to determine the implied choice of the parties in this case, there was no need to resort to the closest and most real connection test (which, according to him, would have been the law of the seat).

It will be interesting to see how Indian courts apply these decisions. The recent English decisions do not give a whole lot of certainty as to the principles that should be followed in determining the proper law of the arbitration agreement, and it will be interesting to see if Indian courts adopt the C v. D — Lord Neuberger reasoning and give precedence to the law of the seat, Lord Justice Moore-Bick’s three step test, or come up with a completely different line of reasoning.

In any case, the drafting lesson here is clear – specify the law governing the arbitration agreement. With the uncertainty on the law in this area, it seems safest to think about and solve the problem at the drafting stage itself.

(Sindhu Sivakumar is part of the faculty on


Use unilateral option clauses sparingly… And check if they can be enforced

SindhuSivakumar_DraftingForArbitrationIn our previous post, we looked at optional arbitration clauses — where the parties may arbitrate their disputes. Such clauses, we found, may be rejected for being uncertain. There is no certainty about the parties’ intention to arbitrate or to oust the jurisdiction of the competent national court.

In this post, we look at a specific type of optional clause — a unilateral option clause. Common in finance contracts, a unilateral option clause provides one of the contracting parties (typically the party with the stronger bargaining position, like the bank in a financing contract) with the flexibility of selecting between arbitration and litigation for the resolution of contractual disputes.

A unilateral option clause can be an arbitration clause with the option to litigate or a jurisdiction clause with the option to arbitrate. See the two examples below.

OptiontoLitigate_Unilateraloptionclause_DraftingforArbitration OptiontoArbitrate_UnilateralOptionClause_DraftingforArbitration

English courts have held both to be enforceable. Other jurisdictions however, may refuse to recognise such clauses for the following reasons.

– Uncertainty: The unilateral option could be construed as undermining the requirement to clearly agree to submit disputes to arbitration.

– Lack of mutuality: The unilateral option may be held to be unenforceable because it does not have the consent of all parties to submit to arbitration. Indian courts have used this argument in the past to invalidate such clauses.

– Unconscionability: The unilateral option may be considered unconscionable (and therefore, invalid), for example in consumer and employment contracts where the contractual parties are not commercial counterparties.

Recent French and Russian decisions for example, have invalidated unilateral clauses — leading to concerns in the international arbitration community that more and more jurisdictions will follow this trend. In the French Rothschild case, on September 26, 2012, the court invalidated a unilateral jurisdictional clause (offering one party the choice between two national courts) because of its potestative nature — it made the fulfilment of the agreement depend upon an event, which only one of the contracting parties had the power to make happen.

Similarly, a Russian decision, on June 19, 2012, held that a unilateral dispute resolution clause was unenforceable on the ground of unconscionability – as it was “contrary to the basic principle of procedural equality of the parties, adverse to the nature of the dispute resolution process, and breach the balance between the interests of the parties.

The drafting lesson here is to firstly, avoid using optionality clauses just for the sake of it — only have them in the contract if your client (assuming your client has the stronger bargaining position and can ask for it) really sees a need for the flexibility it provides. Secondly, check the validity of the clause that you have drafted under the law governing your arbitration clause, the law at your seat, the law at the chosen court (for the litigation option), and the law at your likely place of enforcement.

(Sindhu Sivakumar is a member of the faculty on


Non-mandatory arbitration clauses are also pathological

SindhuSivakumar_DraftingForArbitrationA major reason pathological clauses are so common is that contractual parties and their lawyers, against better judgement, tend to treat arbitration clauses as mere ‘boiler plate’ or ‘midnight’ clauses. Little attention is paid to these clauses when closing the deal and signing the contract.

This leads to all kinds of drafting disasters such as the inconsistent clause we saw in the previous post, which contained an agreement to arbitrate and the designation of a national court to resolve contractual disputes.

Optional or non-mandatory arbitration clauses are another type of pathological clauses. See the following examples.

Drafting-and-Reviewing-Comm-Contracts-Ad-2 “In the case of dispute (contestation), the parties undertake to submit to arbitration but in the case of litigation the Tribunal de la Seine shall have exclusive jurisdiction”

“English law – arbitration, if any, London according ICC Rules” 

“[t]he parties may refer any dispute to arbitration”

The language in all these clauses leads to uncertainty about the parties’ intention and agreement. Did they or did they not intend to submit their disputes to arbitration?

The agreement to arbitrate is the cornerstone of arbitration. An arbitration clause has to — clearly and unequivocally — record the consent of the parties to submit to arbitration. This is essential to conduct any process of dispute resolution outside the national court systems.

Not all the clauses listed above survived when challenged in the courts (which includes the English, Canadian, and Hong Kong courts). Even a pro-arbitration jurisdiction cannot always give effect to arbitration clauses that contain no clear agreement to arbitrate.

Moral of the story? Don’t draft a non-mandatory arbitration clause if your clients have indicated their preference to arbitrate. Make it very clear when drafting your arbitration clause that disputes arising out of or in connection with the underlying contract will be resolved by arbitration. Clearly oust the jurisdiction of the courts.

(Sindhu Sivakumar is a member of the faculty on