Thursday, 17 April 2014 - 2:42 PM
The Arbitration Clause – beware the pitfalls

It is Tokiso’s business to conduct private arbitrations, including those governed by clauses in contracts which give parties the right to initiate an arbitration hearing where they are unable to resolve the dispute themselves in cases of alleged breach. This seems straight forward and our Arbitration Act, be it somewhat outdated, does recognise such a clause and the right of parties to make provision for private arbitration to resolve a dispute. However, it is not uncommon for the dispute resolution clause to be poorly drafted making it unenforceable or onerous.

Some common problems:
  1. Most arbitrations are initiated by the aggrieved party, rather than by agreement. I have found that the most common problem with arbitration clauses is that the contract does not specify how the arbitrator is to be appointed if one party initiates the arbitration.
    The solution is to ensure that there are standard rules which will govern the arbitration process, and these must be referred to in the contract. Most Rules, such as the Tokiso Rules which are available on this website, would include a clause on how the arbitrator is to be appointed failing agreement between the parties, including timeframes for the appointment.  Alternatively, the contract could delegate the power of appointment to an individual or an official from a particular organisation. Either way, if this is not specified, it is a fatal error which most often results in parties going to court rather than enjoying the benefits of private arbitration as they intended.
  2. Another common problem with arbitration clauses is that they do not provide the Rules under which the arbitration is to be conducted. This may leave certain important aspects unclear, such as what law governs the hearing and what process is to be followed where a party refuses to participate in proceedings.
  3. The onerous clause that we regularly see is a clause that provides for three arbitrators, even for the most rudimentary of disputes, making the process potentially expensive and protracted

The above problems often arise due to ‘cut and paste’ jobs, where employees use a standard clause for all contracts without unpacking the consequences of these clauses. To avoid these pitfalls, make sure you are advised by people with experience in the field of ADR and that the clause you use is what you want.  After all, the most effective and fair dispute resolution process is usually one that is agreed to prior to a dispute arising.

For examples of Tokiso’s arbitration clauses as well as Tokiso’s standard arbitration Rules, click here or go to www.tokiso.com and look for these under the link Useful Info.