Arbitration Clause – What it is and why it should be included in the commercial contract?
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What is an arbitration clause?
Commercial contracts often include an arbitration clause. This clause specifies that any disagreements arising from the contract will be resolved through arbitration proceedings. Companies prefer arbitration due to its efficiency and confidentiality, among other benefits.
The arbitration proceedings share similarities with typical court proceedings, involving oral hearings and the admission of written and oral evidence. Despite these parallels, there are noteworthy distinctions that are worth understanding. The following section outlines these differences in detail:
| Quality | Arbitration | District court |
|---|---|---|
| Speed | For instance, the Chamber of Commerce’s arbitration proceedings typically spans around 12 months. The arbitral award is required to be rendered within 9 months from the date the arbitrators received the case file. For cases opting for the expedited arbitration proceedings, the process is accelerated, wrapping up in approximately 6 months. The arbitral award cannot be appealed against. | In 2022, the average duration of a civil dispute was 10 months. For extensive and complex cases, the processing time is longer. Overall duration can be prolonged by several years if an appeal is made to the Court of Appeal and subsequently to the Supreme Court. |
| Flexibility | The parties involved have the autonomy to mutually agree upon the procedure. Additionally, the parties can appoint arbitrator(s) to resolve the dispute. | Agreeing on the procedure is more limited. |
| Confidentiality | Arbitration proceedings and subsequent arbitral award are confidential. | Proceedings and the judgment are usually public. |
| Enforceability | Arbitral awards hold significant global recognition as they are universally enforceable in countries that are signatories to the New York Convention, a treaty boasting over 170 contracting states (including Finland). | Enforceability outside the European Union is subject to certain limitations. |
What are the key considerations for drafting an effective arbitration clause?
The beginning of an arbitration clause typically describes the scope of the arbitration clause, i.e. which specific disputes arising from the contract are subject to the arbitration. The scope is recommended to cover all disputes arising from the contract.
Arbitration clauses often refer to the rules of an arbitration institute. The arbitration institute’s rules describe, among other things, the stages and costs of the arbitration proceedings. When it is agreed in the arbitration clause to follow the rules of a certain arbitration institute, the arbitration institute takes charge of case administration, accompanied by an administration fee. In the context of Finnish companies, arbitration clauses frequently make a reference to the Finland Chamber of Commerce’s rules. Internationally, the rules of arbitration institutes that are commonly referred to, for example, the rules of the International Chamber of Commerce (ICC), the Stockholm Chamber of Commerce (SCC) and the London Court of International Arbitration (London Court of International Arbitration, (LCIA) rules. Most institutes offer an expedited arbitration process, ideal for resolving contractual disputes with clear characteristics and a smaller monetary value. Besides arbitration, the institutes also offer mediation procedures.
The choice of arbitration institute rules should be based on case-by-case assessment. For instance, factors such as the value and the nature of the contract play essential role in this assessment, as the ICC and the LCIA proceedings tend to be more costly compared to those offered by the Finland Chamber of Commerce and the SCC.
In addition to the rules of the arbitration institute, the arbitration clause should also include the language to be used in the proceedings and the number of arbitrators, typically between 1 or 3 arbitrators. The choice of arbitrators affects the costs – the more arbitrators, the more expensive the proceedings. To estimate costs, the Finland Chamber of Commerce provides an online cost calculator on its website. If there are three arbitrators, both parties typically choose one arbitrator each and the arbitration institute appoints the third arbitrator. The parties can set eligibility criteria for arbitrators, such as expertise in specific contracts or industry experience. However, overly unique eligibility criteria should be avoided, as these criteria bind both parties and the arbitration institute. If an arbitrator meeting the eligibility criteria cannot be found, there is a risk of significant delays in initiating the arbitration proceedings or, in extreme cases, the proceedings may not be commenced at all.
It is recommended to specify the place of arbitration (both city and country) in the arbitration clause, also known as “the seat of arbitration”. The place of arbitration determines the procedural law governing the arbitration and in most cases the location where the proceedings will take place. It is equally important to agree on the law governing the contract and its interpretation. It is worth noting that the place of arbitration does not always determine the governing law of the contract. For instance, even if the arbitration is conducted in Helsinki, the contract and its interpretation in the arbitration can be subject to laws other than Finnish.
Arbitration institutes provide model arbitration clauses in various languages on their official websites. While utilizing these model arbitration clauses is generally advisable, their effectiveness should be evaluated on a case-by-case basis.
The parties can opt for a customized approach by agreeing to follow their self-drafted rules or the laws of a specific country, such as Finland. In this scenario, the applicable arbitration procedure is governed by the corresponding laws, like the Arbitration Act (967/1992) in Finland. This alternative method, known as an ad hoc procedure, operates independently without the oversight of any arbitration institution.
In cases where the arbitration clause is not initially included in the contract, parties have the option to enter into an arbitration agreement afterwards. However, reaching an agreement on arbitration can be challenging if a disagreement over the interpretation of the contract has already risen.
What if the parties do not Include an arbitration clause in the contract?
If parties fail to agree on an arbitration clause, the appropriate court and procedure will be determined on a case-by-case basis. In this scenario, disputes between Finnish companies are usually resolved in Finnish district courts; however, the situation is more complex when parties are domiciled in different countries. The absence of a predetermined dispute resolution venue can create uncertainty for the parties, especially if the counterpart is located outside the EU. This situation raises difficult legal questions, leading to prolonged dispute resolution and substantial additional costs. Moreover, the enforcement of a foreign court judgment can be challenging, making it harder for the party suffering damage to secure their rights in case of a breach of contract.
Four tips for drafting an arbitration clause
- Exercise careful consideration of the arbitration clause during contract negotiations.
- Give preference to the arbitration rules of established arbitration institutes and model arbitration clauses provided by reputable arbitration institutes.
- In addition to the reference to the arbitration rules, ensure to agree on the applicable law, place of arbitration, language, and the number of arbitrators.
- Only accept arbitration clauses which you comprehend fully or have verified with legal counsel.
