Key Considerations in Drafting Dispute Resolution Clause in the COVID -19 Era; Pitfalls to Avoid

Authors: Naimeh Masumy* and Gaurav Rai**

The COVID-19 pandemic continues to pose challenges to the arbitral process in an unprecedented manner. It has propelled the arbitration regime across the board in which virtual hearings have predominately replaced face-to-face hearings. As it remains uncertain whether it will be safe for parties to congregate in the same room, it is apparent that virtual arbitrations will continue to proliferate. To this end, many leading arbitral institutes have introduced guidelines and best practices for virtual hearings to ensure a fair and viable alternative to arbitrating in person.[1] Similarly, some jurisdictions have taken substantial steps in recognizing the validity of virtual hearing by producing rulings to circumvent a possible objection to the finality of award.[2] Whilst there is a growing acceptance of virtual hearing amongst the stakeholders of international arbitration, as a potent mechanism, there still exists a lingering concern over due process considerations pertaining to virtual hearings. Such concern may invite overzealous judicial scrutiny of the final award, undermining the expeditious and smooth resolution of the dispute. As such, if the parties elect to conduct a virtual hearing, it is even more critical to carefully tailor a dispute resolution clause that is suited to the specific characteristics of the virtual proceedings and ensure efficient resolution of the dispute.

To this effect, this post aims to highlight key considerations to be factored in by parties when drafting a dispute resolution clause, which considers complications presented by the COVID-19 pandemic. Particular attention should be given to the following issues to produce an even-handed and enforceable award while obviating the risks of litigation.

ESTABLISHMENT OF THE SEAT OF ARBITRATION

The seat of arbitration has a substantial role in determining the law governing internal procedural rules of arbitration and its relationship with court. To this effect, in international arbitrations, national courts provide ancillary support and supervisory control. Effectively, the New York Convention enforces awards by reference to the rules of the seat.  Therefore, the parties ought to exercise caution when selecting a seat and opt for those jurisdictions where the national courts show support virtual hearings. For instance, in the case of Capic v. Ford Motor Company, the Federal Court of Australia took a strong stance towards the viability of virtual hearing to meet the necessary standards of a just and fair hearing.[3] Similarly, in the case of Arconti v. Smith, a Canadian court confirmed the use of readily available technology as an indispensable part of the basic skillset required of courts in 2020.[4] Likewise, the Supreme Court of India has recognized the viability of virtual proceedings by setting out guidelines for the use of video conferencing.[5]  In addition, the Minister of Justice of the Government of China has released guidelines to bolster the use of virtual arbitration.[6] Even the Courts of Hong Kong are taking positive measures towards virtual proceedings[7] which, therefore, give support to the virtual hearings that will be conducted in the HKIAC during the pandemic.[8] Thus, it is important to select a seat that embodies regulations and rules pertaining the conduct of virtual hearing.

Out of an abundance of caution, the parties ought to specify the term “seat” as opposed to other analogous terms such as location, place, and venue. There is a distinction between the seat and the physical location of arbitration. The seat of arbitration does not limit where the arbitration should take place and it has been widely recognized that the seat of arbitration is different from the venue of arbitration. As Article 20(2) of the Model Law puts forward, there is no need for a strong physical connection between the arbitration and the territory of the state where the arbitral proceedings are seated.[9] In a similar vein, the Egyptian Arbitration Law of 1994 notes that the choice of the seat of arbitration does not necessarily mean that all arbitral procedures have to take place within the geographic scope of this seat.[10]Conflating these terms may result in expansive judicial interference.  This is evidenced by BNA v. BNB, in which the Supreme Court of Singapore had to intervene and make a ruling regarding a disputed term “arbitration in Shanghai”.[11] The dispute resolution clause in this case did not explicitly refer to Shanghai as the seat of arbitration. To this effect, parties must refrain from using terms such as “arbitration in London”, “arbitration taking place in Paris” or “based on New York rules”, which will provoke more confusion and may be interpreted as a reference to the hearing or physical location.  This is particularly in the pandemic era in which most arbitrations will not be conducted in physical space.

AD HOC OR INSTITUTIONAL

An equally important component for parties to consider is whether to have their dispute administered by a recognized arbitral institution or to have an ad hoc arbitration.  In light of technical and non-technical challenges posed by virtual hearings, it appears that arbitral institutions may provide more support for minimizing a compromised virtual hearing. These arbitral institutions are not just acting as a postbox and appointing authority. Instead they are involved in conducting a variety of functions to assist and facilitate the tribunal. For instance, they are actively engaged in determining issues in relation to consolidation, expedited proceedings and cost. Article 10 of ICC Rules[12] and Article 15 of the 2017 SCC Rules[13] provide a cogent example in which arbitral tribunals are empowered to make consolidation decision, owing to its administrative nature. Additionally, arbitral institutions such as SIAC and ICC provide detailed guidelines regarding fees applicable to different part of arbitral proceedings.[14] They also review and scrutinize the final award to ensure that the award takes care of the necessary formalities, that there is a basic quality in the award, and that all the issues that were raised during the proceedings have been addressed.[15] In this regard, ICC has noted that scrutiny of the final award is one of the distinctive features of ICC arbitration. Under Article 34 of ICC Rules, the most important function of the ICC is the scrutiny of arbitral awards, approving all awards as to their form and the Court may also, without affecting the arbitrator’s liberty to decisions, draw their attention to points of substance.[16] Notably, as virtual hearings are increasingly becoming plausible, many of these arbitral institutions have introduced protocols and guidelines in relation to technology, software, equipment and platforms to be used by all participants. The best examples of these are the ICC Guidance Note which provides best practice standards to streamline the conduct of virtual hearing,[17] the HKIAC Guidelines for running an efficient virtual hearing[18] and the Stockholm Chamber of Commerce measures to minimize disruption to the arbitral proceedings on a digital platform and to provide means to submit filings and conduct virtual hearings.[19] Apart from these protocols, some arbitral institutes like the American Arbitration Association have enshrined a provision whereby the arbitrator may allow for the presentation of evidence by alternative means, including by video conferencing and internet communication.[20] It is worth noting that there is no necessary linkage between arbitral institutions and the seat of arbitration. Thus, it remains substantively important for the party to refer to these institutional rules accurately.

With arbitrators and attorneys getting more experienced after working in ad hoc and institutional arbitrations, organizations may also prefer an ad hoc arbitration system to resolve their disputes. They may take a cue from their experience in previous arbitrations and lay down rules per their convenience and then eventually choose experienced professionals to conduct the arbitration when the dispute so arises. This will, however, mean that the arbitration clause has to outline the procedure and code of conduct as compared to an institutional arbitration clause since the institution already has such rules in place. However, with the support of the applicable Arbitration Act, the parties can devise a system wherein a virtual hearing and documents only arbitration system can be outlined in an ad hoc setup. The domestic arbitration system in India mostly has ad hoc arbitrations with all tribunals working under the rule of thumb of equal treatment of parties.[21] The practice rules are finalized in the preliminary meeting of the arbitral tribunal. This can be done because the arbitral tribunal is given the freedom to devise the procedure under Section 19(3) unless otherwise agreed by the parties.[22]

SCOPE OF ARBITRATION CLAUSE

The scope of the arbitration clause will effectively delineate the arbitrator’s missions. The scope will define what range of disputes arbitral tribunal may or may not decide. Generally speaking, a broader formulation of the arbitration agreement may be better suited as it leads to a single and centralized tribunal resolving all the disputes relating or connected to this contract, mitigating the risk of having multiple proceedings and inconsistent results from different forums for one dispute.  In the current climate, however, parties may opt for only certain disputes to be resolved via virtual hearing. Given the challenges inherent in the transition to virtual hearing, it is likely in the interests of the parties to only submit those disputes that are more amenable to be resolved efficiently and in a fair manner via digital platforms.

CHOICE OF LAW GOVERNING UNDERLYING CONTRACT AND ARBITRATION AGREEMENT

The law governing the underlying contract and that governing the arbitration agreement are two sets of distinctive laws. With regards to the law governing the underlying contract, the language employed in the clause must provide that all the issues concerning the formation, validity, interpretation, performance and termination of the contract are governed by the substantive law. If the language is too narrow, then some aspects of the contract may be governed by an undesirable law. The parties also have to be wary about mandatory laws that are applicable. On the other hand, when selecting the law pertaining the validity of arbitration agreement, parties ought to select a law that embodies a permissive approach to virtual hearings. Whilst most national laws or arbitration laws do not explicitly address the issue of virtual hearings, some have impliedly recognized the possibility of virtual hearings. For instance, the (Indian) Arbitration and Conciliation Act, 1996 allows the parties to choose the procedure to be adopted to conduct the arbitration proceedings.[23] Considering that the parties chose one set of institutional rules, then the video conferencing guidelines provided under those rules will apply. In addition, if the arbitration provisions incorporate by reference the rules of an arbitral institution (arbitration provider), as some agreements to arbitrate do, then what those rules say about how the hearing may be conducted may provide an answer. For instance, Article 19(2) of the LCIA Rules grants the arbitral tribunal the unfettered discretion to establish hearing by video conference, telephone conference or in person (or a combination of all three).[24]

SELECTION OF ARBITRATORS AND THEIR QUALIFICATION

Parties are free to select the number of arbitrators they deem appropriate according to the cost and the complexity of the case.  It is important to note that multiple arbitrators can provide a useful check for things that a sole arbitrator may miss out on. Moreover, having a diversity of views, backgrounds and expertise may provide a better standard of review. Whilst many shy away from including qualifications of the arbitrators, this post argues that parties should specify technical skills, competency and familiarity of the arbitrators with technology as one of the prerequisites for selection. It has been contended that it may be a better approach to set no qualifications and allow the institutions to appoint the appropriate arbitrator based on their own discretion. However, given the complexity of virtual proceedings, specifying skill sets concerning technology may help parties secure an arbitrator who is apt to deal with the specifications of virtual hearing. A good example of an arbitrator’s qualification is enshrined in Rule 5 of the AIAC Rules where parties can challenge an arbitrator if she does not possess the requisite qualification. [25] Therefore, by making reference to such qualifications in the arbitration clause, the arbitral tribunal, as an appointing authorities, will comply with this specification, obviating the risk of arbitrators facing challenges due to the lack of specific qualifications.

CONCLUSION

Drafting effective arbitration clauses is an art form, in which careful considerations should be attributed to important factors. The international arbitration landscape is evolving rapidly and have given all the stakeholders of arbitration reasons to rethink their ways of devising arbitration clause. Crucially, the traditional approach towards arbitration clause deserves some reassessment. Therefore, it is worthwhile to anticipate adjustment that may be required to guarantee the effective resolution of disputes involving virtual hearings. It is hoped that the following these guidelines will enable the drafters of arbitration clause to navigate the shift towards the new, digitally inclined world by identifying potential pitfalls and recognizing a need for nuanced approach that departs from the conventional way of drafting dispute resolution clause.

[1] E.g., Int’l Chamber of Commerce [ICC], Guidance Note on Possible Measures Aimed at Mitigating the Effects of the COVID-19 Pandemic(Apr. 9, 2020), https://iccwbo.org/content/uploads/sites/3/2020/04/guidance-note-possible-measures-mitigating-effects-covid-19-english.pdf[hereinafter ICC Guidance Note].

[2] E.g., Joe Gaynor, The Legal Landscape Is Changing; Examination for Discovery Ordered to Proceed By Way Of Videoconference, Ontario Trial Laws. Ass’n Blog (May 8, 2020), https://otlablog.com/arconti-v-smith-2020-onsc-2782/.

[3] Capic v Ford Motor Company of Australia Ltd. (Adjournment) [2020] FCA 486 at ¶ 26.

[4] Arconti v. Smith, 2020 ONSC 2782 at [32]-[36].

[5] In re: Guidelines for Court Functioning Through Video Conferencing During Covid-19 Pandemic, Suo Motu Writ (Civ.) No. 5/2020, available at https://main.sci.gov.in/supremecourt/2020/10853/10853_2020_0_1_21588_Judgement_06-Apr-2020.pdf.

[6] ​Yìqíng fáng kòng hé qǐyè fù gōng fù chǎn gōnggòng fǎlǜ fúwù gōng zuò zhǐyǐn (疫情防控和企业复⼯复产公共法律服务⼯作指引)[Guidelines for Public Legal Services for Epidemic Prevention and Control and the Resumption of Work and Production of Enterprises] (promulgated by the Ministry of Just., Mar. 3, 2020), http://www.moj.gov.cn/government_public/content/2020-03/03/tzwj_3243112.html.

[7] Vincent Chow, China Pushes for Increase in Online Dispute Resolution as It Reboots Economy.” Law.Com Int’l (Mar. 19, 2020, 7:42 PM), https://www.law.com/international-edition/2020/03/19/china-pushes-for-increase-in-online-dispute-resolution-as-it-reboots-economy/.

[8] Virtual Hearings at HKIAC: Services and Success Stories, Press Release (May 2020) https://hkiac.glueup.com/event/virtual-hearings-at-hkiac-services-and-success-stories-22546/experience-and-expertise.html

[9] UNCITRAL Model Law on International Commercial Arbitration, Art. 20(2) (1985, amended 2006), https://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf.

[10] Law No. 27 of 1994 (Law Concerning Arbitration in Civil and Commercial Matters, Official Gazette, No. 16 (bis), Apr. 21, 1994, art. 28 translated at https://www.wipo.int/edocs/lexdocs/laws/en/eg/eg020en.pdf

[11] BNA v. BNB, [2019] SGCA 84 at [65-69].

[12] ICC, Arbitration Rules, art. 10 (2021).

[13] Arb. Institute of the Stockholm Chamber of Commerce [SCC] Rules, Rule 15 (2017).

[14] SIAC Estimate Your Fees. https://www.siac.org.sg/estimate-your-fees/siac-schedule-of-fees. See Costs and Payments International Chamber of Commerce. https://iccwbo.org/dispute-resolution-services/arbitration/costs-and-payments/.

[15] SIAC, Arbitration Rules, art 32.3 (2016).

[16] ICC, Arbitration Rules, art. 34 (2021).

[17] ICC Guidance Note, supra note 1.

[18] Hong Kong Int’l Arb. Ctr. [HKIAC], Guidelines for Virtual Hearings, https://www.hkiac.org/sites/default/files/ck_filebrowser/HKIAC%20Guidelines%20for%20Virtual%20Hearings_3.pdf.

[19] Stockholm International Hearing Centre Launches Platform for Virtual Hearings – The Arbitration Institute of the Stockholm Chamber of Commerce, Arb. Inst. of the Stockholm Chamber of Com. (Apr. 27, 2020),  https://sccinstitute.com/about-the-scc/news/2020/stockholm-international-hearing-centre-launches-platform-for-virtual-hearings/.

[20] Am. Arb. Ass’n [AAA], Commercial Arbitration Rules, Rule 32(c).

[21] Madhur Baya & LexArbitri, Commercial Arbitration: India, Global Arb. Rev. (Apr. 2, 2020), https://globalarbitrationreview.com/jurisdiction/1006488/india

[22] Arbitration and Conciliation Act, 1996, §19, No. 19 of 1996, India Code.

[23] Id.

[24] London Ct. of Int’l Arb. [LCIA] Rules, art. 19(2) (Oct. 1, 2020).

[25] Asian Int’l Arb. Ctr. [AIAC], Rule 5 (Mar. 9, 2018).

*Naimeh serves as a research fellow at Swiss International Law School. She is on ITA Advisory Board and member of editorials boards of ITA in Review. <https://www.linkedin.com/in/naimeh-masumy-7727a522/ >
**Gaurav Rai holds a BBA.LLB(Hons.) degree from National Law University Odisha, India and a Master of Laws (LL.M) from University College London, UK. He is an Advocate registered in India with the Bar Council of Delhi since 2017 and is associated with the office of the Arbitrator Justice A.K. Patnaik, Former Judge, Supreme Court of India. His primary focus is on arbitration and contract law. He can be contacted at raigaurav.legal@gmail.com. <https://www.linkedin.com/in/gauravrai91/>