National Workshop on Drafting of Commercial Agreements - PowerPoint Presentation

Slide1

National Workshop on Drafting of Commercial Agreements

Tejas Karia

Partner Shardul Amarchand Mangaldas & Co.

3 September 2016

Essentials of International

Dispute Resolution ClausesSlide2

Introduction

Dispute Resolution Clauses are often relegated to the end of contractual negotiations.

Referred to as ‘midnight clause’ – lack of deliberation and thought on the drafting of the clause. Dismissed as ‘boilerplate’ and given standard wording. They should be customized depending on the needs of the parties and the specific agreements.

2Slide3

Arbitration v/s Litigation

Speed

CostChoice of arbitratorFlexibility of procedure

Arbitrability

Award

executed as a decree

Limited

grounds for challenge to an Award

Privacy

Privileged & Confidential

|

3Slide4

Litigation Clauses

If parties decide to resolve their disputes by going to court instead of

arbitration, they must consider the following: Which national court would have jurisdiction – factors influencing would be convenience, preferred judicial system and enforcement.Whether such jurisdiction is exclusive or non-exclusive, Exclusive jurisdiction gives certainty and greater protection.

Non-Exclusive jurisdiction offers flexibility. 4Slide5

Drafting Of An Effective Arbitration Clause

Arbitration clauses

checklistPreliminary Consideration: Is Arbitration the best dispute resolution option?Multi – step Clauses: Inclusion of negotiation and / or mediation prior to commencement of arbitration.

Which disputes will be

arbitrated?Who

will arbitrate and how will the tribunal be selected

?

“

Seat/ Place” of arbitration. (Venue of arbitration)

Language

of the arbitration.Using an arbitration institution.Choice

of law/ governing

law.

Currency

in which the award will be

made

Remedies

Privileged & Confidential

|

5Slide6

Drafting Of An Effective Arbitration Clause

Privileged & Confidential

|

6

Basic provisions

Additional Provisions

Scope / Disputes Covered

Number of Arbitrators

Governing Law Seat/Venue

Jurisdiction

Language

Number of Parties

Rules

etc

(Ad-hoc or Institutional)Good faith discussions Qualification and nationality of Arbitrator

Appointing authority

Other matters- confidentiality etc.Slide7

Scope of the Clause

Clause

should be broadly worded – ‘arising out of or in connection with’ to include all disputes within the ambit of the arbitration agreement. Narrow arbitration clause would raise debate on whether a particular dispute is covered under the scope of the arbitration agreement. E.g. related agreements. It is also important to ensure that the disputes covered by the clause is arbitrable. Disputes which are non arbitrable in India are matrimonial disputes, winding up matters, insolvency and testamentary matters etc.

Latest addition is disputes relating to trust, trustees and beneficiaries arising out of the Trust Deed and the Trust Act are not capable of being resolved by arbitration.

7Slide8

Arbitration Agreement

Section

2(1) (b) r/w Section 7 of the 1996 Act: “Arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether

contractual or not.

Requisites

for a valid arbitration agreement

Agreements must be

in writing

and signed by parties.

Is

considered to be in writing Document signed by parties

Exchange

of letters, telex or other means of

telecommunication

Exchange

of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

Agreement may also be incorporated by reference (reference to an

agreement, which

contains an arbitration clause)

Privileged & Confidential

|

8Slide9

Arbitration Agreement

It must be in respect of existing or future

disputes.It can be inferred from documents / related agreements / correspondence / acts of parties.An arbitration clause which forms part of a contract shall be treated as an independent

agreement and is severable from the main contract.

Privileged & Confidential

|

9Slide10

Arbitration Agreement

Severability

An arbitration clause survives the main contract.Section 16 (1) (b)- merely because the contract is ruled to be null and void, does not entail ipso jure, the invalidity of the arbitration clause. The same may survive Termination

Repudiation

Frustration

Rescission

The arbitration clause does not survive:

Substitution by a new

contract

Discharge

of the contract

Privileged & Confidential

|

10Slide11

Arbitrability

Section

2(3)-Part I shall not affect any other law by virtue of which certain disputes may not be submitted to arbitration.Certain disputes cannot be resolved through arbitration.disputes relating to rights and liabilities which give rise to or arise out of criminal offences

matrimonial disputes (divorce

, judicial separation, restitution of conjugal rights, child custody)

guardianship matters;

insolvency and winding-up matters;

testamentary matters (grants of probate, letters of administration and succession certificate

)

eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the

disputes (Booze Allen and Hamilton v. SBI Home Finance Limited (2011) 5 SCC 532 ) contd..

..

contd

Privileged & Confidential

|

11Slide12

Arbitrability

Narrow Interpretation of

Non-ArbitrabilityExample: Where facts relating to a criminal matter give rise to right to claim damages or where husband and wife enter into agreement

over terms of their separation, such disputes will be

arbitrable.

Power

to Grant Specific Relief

There is no prohibition in the Specific Relief Act, 1963 that issues relating to specific performance of contract relating to immovable property cannot be referred to arbitration. Neither 1996 Act prohibits such reference as

contrasted with Section 15 of the English Arbitration Act, 1950 or Section 48(5)(b) of the English Arbitration Act, 1996 which contains a prohibition relating to specific performance of contracts concerning immovable property.

(

Olympus Superstructures v. Meena Vijay 1999 (5) SCC 651)

Test of Arbitrability for Specific

Relief

In the context of a

mortgage suit for sale of mortgaged property held that it was

action in rem

and not an action in personam . Hence, not arbitrable. (

Booze Allen and Hamilton v. SBI Home Finance Limited

)

.

..

contd

Privileged & Confidential

|

12Slide13

Choice of Law

Various laws involved in an international commercial arbitration. Parties can choose different laws:

Substantive Law governing the contract Law governing arbitration agreement – obligation to submit the dispute to arbitration, validity of the arbitration agreementLaw governing procedure – determines questions of procedure, i.e. evidence, powers and duties of arbitral tribunal (usually the law of the seat). Essential to specify, at least, the substantive law, law governing arbitration agreement and the law governing procedure, in order to avoid ambiguity.

13Slide14

Importance of the ‘Seat’

It is important to specify seat of the arbitration as it decides

The law governing the procedure of the arbitration.The law governing arbitration agreement, if parties have not explicitly chosen it. Courts of the seat have supervisory jurisdiction over the arbitral process.Whether the award will be enforceable in India- reciprocity requirements under Section 44 of the Act, e.g. South Africa/Indonesia are not notified therefore any awards from arbitrations seated there will not enforceable in India. Seat v. Venue – clause can provide for a convenient venue for arbitration even if seat is another country.

14Slide15

Deciding Seat of Arbitration

Arbitration Laws of the country, which is the seat of arbitration

Mandatory rules would apply – select a seat where laws allow maximum party autonomy and limited judicial intervention.Courts can be approached in case of discovery, interim relief etc. If courts of the seat set aside award, may not be enforceable in any other jurisdictionLogisticsGeographically convenient for parties, witnesses, experts.Adequate facility to conduct arbitration.Diverse pool of arbitrators.

Language of arbitration.

15Slide16

Number of Arbitrators

Arbitration clause should include whether there will be a sole

arbitrator or a panel of ArbitratorsFactors to consider while deciding number of arbitrators – quantum of claims, nature of claims and relationship between parties. Procedure Parties can decide themselves in the contractParties can select an institution to appoint an arbitrator

if agreed procedure fails, party can always approach the court to appoint arbitrator. 16Slide17

Escalation Clauses

Arbitration clauses can also include mediation/negotiation as a pre-condition to arbitration. Also known as ‘escalation clauses’ or ‘step-clauses’.

Initial steps are mostly to reach an amicable settlement and to avoid arbitration. Appropriate in case of parties with long standing and on-going commercial relationship.Well structured multi-tier arbitration clauses can help parties reach an early settlement and maybe cheaper and faster. Parties can take advantage and unnecessarily delay the process. Important to have time limits at each step. Mediation

Parties discuss in presence of a neutral person (mediator) who controls the process and directs discussion. Mediator does not resolve the dispute, he only facilitates. He generates resolution options and assists parties in drafting a settlement.

17Slide18

Structured and Ad-hoc Arbitration

.

..

contd

Privileged & Confidential |

18

Advantages of Institutional Arbitration

Advantages of ad-hoc Arbitrations

If the Arbitration is being conducted under the auspices of an arbitral Institution, it is common for that institution to be involved in the administration of the reference. The main advantages of institutional/structured arbitrations are:-

It provides a procedural framework for the case. For example, it will arrange service on the other party and may act as a conduit for communications between the Tribunal and the parties.

If concerned with the particular field of commerce, it may be able to provide specialist services or arbitrators with particular expertise.

N

ot all arbitration rules involve administration of the reference by an Institute. ‘UNCITRAL’ arbitration rules for example are specifically designed for use in ‘ad-hoc arbitrations’. In an ad-hoc arbitration, parties and arbitrators either develop their own rules in the Arbitration Agreement or at the time of the arbitration, or they use standard rules that have been promulgated to assist parties in ad-hoc arbitration. The advantages are

As the rules are the guidelines which form the procedural framework for the arbitral proceedings, it follows that such arbitrations are cost effective and do not involve the rule of an intermediary institute to facilitate proceedings

.

(contd..)Slide19

Structured and Ad-hoc Arbitration

.

..

contd

Privileged & Confidential |

19

Advantages of Institutional/Structured Arbitration

Advantages of ad-hoc Arbitrations

Certain arbitral institutes have introduced procedures which are designed to improve the speed, cost and efficiency of the arbitration process.

The Institutional arbitration may serve to relieve the parties of some of the administrative burden of conducting reference. The supervision provided by institutions, for the arbitration proceedings includes:

ensuring that all parties and the arbitral tribunal receive written statements

approving the terms of reference

assisting the parties and the arbitrators to deal with administrative problems;

However, the absence of an administering institution means that the arbitrators will have to perform administrative functions such as maintaining files, dockets and correspondence. This may distract arbitrators, create additional delay and increase costs.

The best known ad hoc arbitration rules are the UNCITRAL Arbitration Rules. Parties should clearly designate the applicable set of rules in their agreements to arbitrate.

Slide20

Structured and Ad-hoc Arbitration

.

..

contd

Privileged & Confidential |

20

Advantages of Institutional/Structured Arbitration

Advantages of ad-hoc Arbitrations

encouraging the arbitral tribunal to make the award without delay; and

checking the award and approving it.

Use of institutions to appoint the arbitral tribunal, where they take on the rule of “Appointing Authority”, may be considerably more effective, cheaper and quicker than applying to the Court.

Scrutinize awards for compliance with the

organisation’s

applicable rules.

Parties opting for ad hoc arbitrators can greatly reduce the possibility of deadlock in appointing the arbitral tribunal by designating an “appointing authority” in their arbitration clause. The appointing authority will be charged with selecting arbitrators should the parties be unable to

come

to an agreement.

Slide21

Conclusion

Parties have various options of dispute resolution – litigation, arbitration and other hybrid clauses.

Parties should carefully choose the governing law of the contract and arbitration. They should make an informed decision depending on the nature of the contract, stakes involved and the relationship between the parties. 21Slide22

THANK YOU