D. The Arbitration Agreement

The arbitration agreement is the very cornerstone of any arbitration: Without a valid arbitration agreement, there is no arbitration. Most jurisdictions and institutions will consider an arbitration agreement 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 (see for example Art. 7 UNCITRAL Model Law where this generic definition was taken from). In most cases, the arbitration agreement will be contained in the main contract by the parties in the form of an arbitration clause and thus will be concluded before a dispute has arisen. Yet, an arbitration agreement can also be concluded in a separate document and even so after the outbreak of the dispute (agreements of the latter type are also referred to as submission agreements). In comparison to the latter, however, arbitration agreements are far more often concluded at the time of the conclusion of the contract since once the dispute has arisen it is far more difficult for the parties to reach a consensus.

Where a valid arbitration agreement between the parties exists, the parties have waived their right to have any dispute covered by the agreement settled before a state court. Instead, the arbitration agreement is the basis for the jurisdiction of the arbitral tribunal to be appointed. In multiparty relationships it is important to keep in mind that the arbitration agreement only has effect for the parties to the agreement. This can be of relevance in situations of several related contracts or where more than just two parties are part to the same contract. Whereas in the first situation more then one arbitration agreement is normally required, special attention should be paid to the appointment procedure of arbitrators in the second scenario.

I.                  Positive Requirements

The requirements for an arbitration agreement to be valid in principle depend on the law applicable to the arbitration agreement. If the parties select a law differing from the law of the country of the seat of the arbitration (i.e. the law of the forum state), also the requirements stipulated by the mandatory provisions of the law of the country of the seat of the arbitration should be taken into account. In any case, also the requirements of the New York Convention should be paid regard to. Otherwise there is a risk that the award is annulled or refused enforcement.[1] In most cases this means that the parties must have the capacity to sign the arbitration agreement, that the subject matter of the dispute is arbitrable and that the form requirements of the law applicable to the arbitration agreement must be met.

Issues as to the capacity of a party to sign an arbitration agreement (also referred to as subjective arbitrability) may arise when the signing party is a minor or when the person signing the agreement lacks authorization to do so for one of the parties (see for example Art. 34 Section II lit. (a) (i) UNCITRAL Model Law or Art. V Section 1 lit. (a) New York Convention).

With respect to the arbitrability of the subject matter (also referred to as objective arbitrability), most jurisdictions regard issues such as criminal matters, child custody, family matters or bankruptcy as not arbitrable. Questions as to the validity of the arbitration agreement may, however, also arise when patent law, antitrust law or securities issues are involved. Again, parties are well advised to give regard to the law of the forum state and the law of the enforcement state since otherwise they run the risk that their award is set aside under Art. 34 II lit. (b) (i) UNCITRAL Model Law or refused enforcement according to Art. V Section 2 lit. (a) New York Convention.

As to the form requirements, most national arbitration laws require the arbitration agreement to be in writing although they often define the writing requirement differently. Also Art. 7 UNCITRAL Model Law in the version of 1985 entailed a written form requirement according to which the agreement had to be contained “in a document signed by the parties or in an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement.” In 2006, however, UNCITRAL revised Art. 7 UNCITRAL Model Law. As a consequence, states nowadays adopting the UNCITRAL Model Law may choose between two options of Art. 7. One of the options expressly extends the writing requirement to more modern means of communication, such as e-mails or telecopies. In the other option of Art. 7 UNCITRAL Model Law, the writing requirement has been given up altogether.

Also Art. II Section 2 of the New York Convention often is understood to contain a written form requirement. Pursuant to this provision, “the term “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” Because of this at first glance strict requirement, the written form requirement unfortunately has proofed to be an obstacle for the enforcement of many awards. To solve this issue, it has been suggested to apply the most-favorable-law provision of Art. VII Section 1 New York Convention, according to which a party attempting to enforce an arbitral award to take advantage of any more favorable law in the enforcing jurisdiction, also with regard to the validity of arbitration agreements. Furthermore, it has been argued that because the New York Convention addresses the enforcement states and not the parties, Art. II Section 2 New York Convention should not be read to stipulate a form requirement but rather as stipulating the maximum form requirement admissible for the domestic arbitration laws of its member states. In any case, UNCITRAL recommends to regard the circumstances described in Art. II Section 2 in the New York Convention as not exhaustive.[2]


II.                Negative Requirements

Apart from the positive requirements that a valid arbitration agreement must meet to be enforcable, the New York Convention also stipulates certain negative criteria that must not be fulfilled by the arbitration agreement. Pursuant to Art. II Sections (1) and (2) New York Convention, a court does not have to refer a matter to arbitration when the arbitration agreement is “null and void, inoperable or incapable of being performed.” While there is no unanimously accepted definition of these terms, an arbitration agreement could be null and void for instance, if the language used in the agreement is so vague that the parties’ intent cannot be determined. An arbitral agreement could be inoperable when, for example, the issues in question were rendered res judicata in a previous decision. An agreement is often considered inoperable, if, for instance, the parties chose an arbitral institution that does not exist.[3]

To avoid a pathological arbitration agreement, most arbitral institutions offer model clauses that the parties are well advised to rely on. For example UNCITRAL suggests that the parties conclude an arbitration agreement according to which “[a]ny dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules.” In most of the cases, the arbitral institution will suggest that the parties’ agreement should contain more than just the obligatory agreement of the parties, meaning that also the number and mechanism of arbitrators to be appointed, the place and the language of the arbitration etc. should be added to it. Unfortunately, however, arbitration clauses are often added to a contract in the very last minute of the contract negotiations without the parties giving much thought to it (therefore these clauses are often referred to as “midnight” or “champagne clauses”).

III.            Doctrine of Separability

According to the doctrine of separability (also referred to as doctrine of severability or doctrine of autonomy), an arbitration clause that forms part of a contract is considered a separate agreement when questions of existence or validity of the contract arise. That way it can be ensured that the arbitral tribunal is not deprived from its jurisdiction if the underlying contract is determined to be invalid or to have terminated.


IV.                  Binding Third Parties

As mentioned before, an arbitration agreement can generally only bind the parties to the agreement. Yet, in some cases arbitral tribunals have made exceptions, for example pursuant to the group of company doctrine, equitable estoppel or the theory of veil piercing (also referred to as “alter ego”). Under the group of company doctrine, a non-signatory affiliate of a signatory can be seen as bound by an arbitration agreement of the signatory in cases in which the affiliate’s obligations and responsibilities are significantly interrelated with that of the signatory. According to the principle of equitable estoppel, a party can be barred from benefitting from enjoying rights and benefits under a contract while at the same time avoiding its burdens and its obligations. In contrast to that, the theory of veil piercing allows to treat a parent company and its subsidiary as one legal entity in cases in which the companies’ conduct is deemed to express an abandonment of separateness. Unless, however, the application of one of those theories is expressly provided for by an agreement of the parties, it is usually within the discretion of the arbitral tribunal to accept or reject the application of any of those doctrines.

[1] For more details on the law applicable to the arbitration agreement and the New York Convention see below.

[2] See Recommendation regarding the interpretation of article II, paragraph 2, and article VII, paragraph 1, of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done in New York, 10 June 1958 (2006), available at http://www.uncitral.org/pdf/english/texts/arbitration/NY-conv/A2E.pdf (last checked on August 1, 2015).

[3] Note, however, a recent decision of the Singapore High Court from the year 2013 in which the court held that such an arbitration clause could be operable under certain circumstances.

Last modified: Sunday, 30 August 2015, 9:41 PM