UNDERSTANDING AN ARBITRATION CLAUSE IN A DOMESTIC COMMERCIAL AGREEMENT

Introduction

One of the choices available to resolving a commercial dispute is by arbitration. It is a process of dispute resolution distinct from the traditional litigation, mediation and conciliation.

Arbitration is the reference of a dispute between two or more parties for a determination, after consideration of the evidence adduced and arguments of all parties, by a person or persons validly appointed acting judicially. It is the process of bringing a business dispute before a disinterested third party for resolution.

Although the legal foundation of some kinds of arbitration is to be found in a particular statute, most commercial arbitrations owe their existence to an agreement between the parties to the effect that their dispute shall be referred to arbitration. In essence, the use of arbitration as a means of resolving dispute can be by a creation of law or by parties who have chosen and agreed to refer their disputes to a tribunal of their choosing, instead to a court.

The Arbitration Agreement

The Arbitration and Conciliation Act, 1988 (“Act) regulates arbitration in Nigeria. This law, however does not provide for the definition of an “arbitration agreement”. Thus, for this of definition, the Lagos State Arbitration Law 2009 (“Law”) is looked into.

Section 3(1) of the Law reads “An arbitration agreement is an agreement by the parties to submit to arbitration a dispute which has arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.” The agreement may be in a contract or in the form of a separate agreement. It is a voluntary contractual agreement by parties that must be performed in good faith. This agreement must be  in writing – Section 3(3) of the Law – precise ad mandatory.

An arbitration agreement is a contract and it therefore follows that capacity to include an arbitration is precisely the same as capacity to enter into contracts generally. Accordingly, minors, bankrupts, agents and others governed by the general principles of contract are not lawfully allowed to be parties in this context.

Since an arbitration agreement is a contract between the parties, it follows that it cannot be altered unilaterally by one of the parties nor by the arbitrator. However, it is open to the parties at any time to alter or amend by mutual agreement. It is noteworthy that if it is proposed to alter a written agreement, it is prudent to ensure that the alteration is itself in writing so as to avoid the risk that amendment was not agreed to.

Drafting the Arbitration Agreement

In carefully drafting the arbitration agreement or clause, the following should be considered:

1.  Construction and scope: Parties should consider the types of disputes they want covered by the agreement. If they intend to restrict arbitration to contract disputes only, a narrow-form arbitration clause should be drafted e.g. “All disputes arising out of or under this contract”. If parties intend to include all potential disputes related to the contract, the clause can be drafted as “All disputes arising out of, connected with, or relating in any way to this agreement”.
2.  Numbers of Arbitrators: This is a matter for the parties. Where parties do not specify the number, Section 6 of the Act provides that it shall be three (3) arbitrators. It is desirable that where sum of money involved in the contract is not large and complex issues are not involved, a sole arbitrator be appointed. If three arbitrators are to be appointed, the procedure is that both each parties appoints an arbitrator and both arbitrators appoint the presiding arbitrator. The number of arbitrators should be odd. 
3. Appointment of Arbitrator: The parties may designate an arbitration institution; professional body; trade association; existing arbitrators; the court,  with neutral credibility to appoint an independent and impartial arbitrator for the arbitral proceedings when it arises.
4. Seat or Place of Arbitration: The seat of arbitration is vital to any arbitration proceeding. This determines which courts have supervisory power over the arbitration and the scope of those powers. Importantly, the seat of the arbitration is crucial to the validity of the arbitration agreement, arbitration procedure, protection of an arbitral award and its enforceability. Parties should be aware that “seat of arbitration” differs from “venue of arbitration”.  Venue of arbitration is a mere geographical location chosen on the basis on convenience where the arbitration proceedings are held. It is however desirable that the law governing the contract should be the law
5. Language of Arbitration: Parties should specify the language to be used in the proceedings. Where it is not stated, the language of the contract may be considered or the seat of the arbitration may determine the language of the arbitration.

Conclusion

It is important that parties should avoid ending up with a “pathological” arbitration agreement/clause i.e. a defective arbitration clause. It disrupts the smooth progress of the arbitration. In most cases, the defect is due to the breach of some requirement under the applicable law to the arbitration agreement. Defective clauses like submitting to non-existing arbitration institutions; too much specificity with respect to the arbitrators’ qualifications; unavailability of a specific person named as arbitrator; an appointing body unknown to law, to mention a few.

Where a pathological clause is avoided, a smooth arbitral proceedings ensue from a valid arbitration agreement.