This is the edited script of Lecture 2 of the Lecture Series on International Arbitration Practice. The lecture series can be accessed from here:
This 2nd lecture of
the lecture series on Introduction to International Arbitration Practice is
titled Mistakes to Avoid While Drafting Arbitration Agreements a.k.a.
Pathological Arbitration Clauses”. Pardon the lengthy title. Those who watched
the first lecture might be wondering where “arbitration practice” was in it.
Let me assure you: this course would not teach arbitration theory. But some
theoretical discussion explaining key concepts and doctrines act as a
springboard to understand practical aspects. For example, we discussed in the
first lecture about the ingredients of an arbitration agreement as per the
UNCITRAL Model Law on International Commercial Arbitration, 1985 and the
Arbitration and Conciliation Act, 1996. One of the ingredients was that there
should be a reference to arbitration. In other words, an agreement to
constitute an arbitration agreement should provide that disputes that may arise
would be referred to arbitration. In other words, the agreement should provide
for reference of disputes to arbitration in order to call it an arbitration
agreement.
In this lecture, we will see that
if an agreement provides arbitration as an option for both parties to agree to
refer disputes, such an agreement is not an arbitration agreement although
parties might have, at the time of entering into the agreement, had that in
their minds. Such clauses which although purport to be arbitration clauses have
some defects that are grounds for not calling them as arbitration clauses are
known in arbitration parlance as “pathological” arbitration clauses. In other words, a pathological arbitration
clause is a Defective or badly drafted arbitration clause. So, in order to
discuss the common mistakes while drafting arbitration agreements, that is,
pathological arbitration clauses, the theoretical prelude was necessary.
In this lecture and the next few,
we will discuss some common mistakes parties make while drafting arbitration
clauses. Arbitration practice is not only about representing parties in
arbitrations but also about advising parties to draft proper arbitration
agreements. In India, like in many other countries, this aspect of law practice
is largely ignored. Through this lecture, we bring to the attention of lawyers
about the importance of drafting good arbitration clauses. Before embarking on
the exercise as to how to draft arbitration clauses, it would be better to
understand how not to draft arbitration clauses, now that we are well-aware of
what is meant by arbitration agreements from the first lecture in the lecture
series. For your convenience, we have provided the link to the first lecture in
the description to this video.
Coming back to the topic of
pathological arbitration clauses, the term “pathological” was used in this
context by Frederic Eisemann in 1974 and thereafter, the phrase has become quite
popular in international arbitration parlance.
Courts have addressed
pathological arbitration clauses with a set of tools, mainly with the intent of
enforcing arbitration clauses, known popularly in arbitration parlance as
pro-arbitration approach. Courts have generally been liberal in addressing such
clauses, that is, resolving it in favour of referring them to arbitration,
rather than rejecting reference, unless the clause in question cannot satisfy
the ingredients of what constitutes an arbitration agreement.
Now, you might wonder, why should
I know about this topic? Why can’t this guy straightaway talk about invoking
arbitration, pleadings, evidence, etc.? Well, a pathological arbitration clause
may have huge consequences on enforceability of arbitral awards, and may entail
substantial costs and efforts to be expended by your client. A badly drafted
arbitration clause may ruin your reputation as a lawyer.
So, be very very careful-
drafting arbitration clauses might sound simple but when you see the
pathological arbitration clauses, you might wonder: how did this happen?! Without
spending much time “about” pathological clauses, we will straightaway deal
“with” such clauses.
Let us consider the below clause.
“30.2 In case of such failure,
the dispute shall be referred to sole arbitrator to be mutually agreed upon by
the Parties. In case the Parties are not able to arrive at such an arbitrator,
the arbitrator appointed shall be appointed in accordance with the rules of
arbitration of the Singapore Chamber of Commerce.”
Please pause the video and find out
what’s wrong with this clause. On the first reading, you will ask: what is
wrong with this clause? The clause seems to be fine. But on a closer reading
and with a search engine, you will notice that there is no such institution
called Singapore Chamber of Commerce. The parties here possibly got confused
between the International Chamber of Commerce and the Singapore International
Arbitration Centre.
So, this is a type of defect
where parties agree to refer the dispute to a non-existent arbitral
institution. If there is no such institution, how can the arbitration be
conducted as per the rules of the non-existent institution? I will underline
the defective portion for your convenience.
“30.2 In case of such failure,
the dispute shall be referred to sole arbitrator to be mutually agreed upon by
the Parties. In case the Parties are not able to arrive at such an arbitrator,
the arbitrator appointed shall be appointed in accordance with the rules
of arbitration of the Singapore Chamber of Commerce.”
You might be wondering if this
fact situation we discussed was real. This arose in the case of Pricol Ltd. v.
Johnson Controls Enterprises Ltd., a decision of the Supreme Court of India in
2014, which arose out of a joint venture agreement between the said parties. We
have provided the link to this decision in the lecture’s description. So the
lesson that we learn is if you are opting for institutional arbitration, make
sure that you refer to the institution’s name correctly.
This defect typically takes place
when non-lawyers negotiate the arbitration clause. Nevertheless, such defects
are common. For those supremely confident lawyers, let me tell you about this
transaction, from a Press Release dated about ten years ago, that is, 27 March
2012.
“Johnson Controls, a global
leader in automotive seating, overhead systems, door and instrument panels, and
interior electronics, has formed a joint venture with Pricol Limited, a leading
supplier of automotive instrument clusters in India…
About Johnson Controls:
Johnson Controls is a global
diversified technology and industrial leader serving customers in more than 150
countries. Our 162,000 employees create quality products, services and
solutions to optimize energy and operational efficiencies of buildings;
lead-acid automotive batteries and advanced batteries for hybrid and electric
vehicles; and interior systems for automobiles. Our commitment to
sustainability dates back to our roots in 1885, with the invention of the first
electric room thermostat…
…
About Pricol:
Pricol, which started its
operations 35 years ago, is a well-known name in the Indian automotive
component sector. Over the last 25 years, Pricol has been a leading supplier of
automotive instrument clusters for two wheelers, cars, trucks and tractors in
India. The company supports automakers and after-market customers across
Europe, America, Middle East and Australasia and supplies instruments and other
products including sensors, oil pumps, chain tensioners, fleet management
solution products…”
Apologies for the lengthy quote.
I am not trying to consume your time with an unnecessary quote but to drive
home the point that such drafting defects take place even when global and
well-experienced companies or sophisticated parties are involved in a
transaction, which was probably drafted with legal advice. Link to the complete
press release is provided in the link to the description below.
More on pathological arbitration
clauses in the next lecture. Till
then, adios y hasta luego.
References:
Lecture 1: Introduction to
Arbitration Agreements, https://youtu.be/Q4MXe7Z__d4
Pricol Limited v. Johnson
Controls Enterprise Ltd (SCI: 2014), https://indiankanoon.org/doc/168474344/
Press Release, Johnson Controls
and Pricol Establish Joint Venture for Indian Automotive Market (27 March
2012), https://investors.johnsoncontrols.com/news-and-events/press-releases/johnson-controls-inc/2012/27-03-2012
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