Reasons Why Arbitration Clauses for Commercial Disputes May Be Defective

Falling into a commercial dispute can cause many problems for your business. One way to resolve a commercial dispute is by obtaining a court order through arbitration. Arbitration or international commercial arbitration is an alternative dispute resolution (ADR) method, similar to mediation and negotiation. However, although both parties’ intentions may be to use the arbitration process, this may not be possible if you have a defective arbitration clause. This article will explain why arbitration clauses may be defective. 

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What is Commercial Arbitration? 

Commercial arbitration is a form of alternative dispute resolution (ADR). It is where you choose an arbitral panel to decide upon the result of your dispute. Arbitration consists of one or more expert arbitrators who will listen to both arguments in the dispute and attempt to resolve it with a binding arbitral award. 

As part of your contract, you might have a disputes clause outlining arbitration as your preferred method of dispute resolution. This means that if future disputes arise, you agree to use arbitration to settle the matter between contracting parites.

Alternatively, you might enter a separate arbitration agreement. The purpose of either of these methods is to confirm your intention to use arbitration to resolve potential disputes rather than proceeding to court straightaway. 

Unfortunately, there may be situations where your arbitration clause is defective. 

Why Might My Arbitration Clause Be Defective?

Defective arbitration clauses in commercial contracts often result from the following:

• inconsistency;
• uncertainty; and 
• inoperability. 

A reason that your arbitration clause may be defective is because it does not explicitly state that arbitration is the preferred dispute resolution method. Instead,  it may state that parties cannot initiate court proceedings or that some other method is preferred, such as mediation. Therefore, it is crucial that your arbitration clause is exact and explicit. Even if it is obvious, include it in our contract. 

When you choose arbitration for your preferred resolution method, you may include a specific arbitral institution. However, if your arbitration clause lists an institution that no longer or never did exist, this could make your arbitration clause defective. Simply referring to a non-valid arbitration institution can also invalidate the arbitration clause. For example, you may refer to an arbitration court, a specific city’s arbitration court, yet there may be many in that city, each with a specific name. Therefore, you are recommended to find a suitable dispute solicitor to check the arbitral institution details. 

Additionally, an issue with the contract itself likely suggests the arbitration clause is defective. If a court deems your contract to be invalid, the arbitration clause might consequently be invalid.

Key Takeaways

You may choose arbitration as a resolution method to resolve your dispute. This means that an arbitral panel will hear evidence in the dispute and make a binding decision, otherwise known as the arbitral award. If you choose arbitration to resolve your business disagreement, you will potentially have an arbitration clause in your commercial contract. However, arbitration clauses can be defective, and consequently, the other party might push for litigation. Court proceedings can be costly and lengthy, so you should ensure your arbitration clause is well-drafted. A defective arbitration clause can arise from an inconsistency, uncertainty or inoperability. 

If you need help understanding arbitration clauses for commercial disputes, our experienced disputes and litigation solicitors can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.