Arbitration is "a method of dispute resolution involving one or more neutral third parties who are usually agreed to by the disputing parties and whose decision is binding” (as defined by Black’s Law Dictionary 119,9th ed. 2009). It is a form of alternative dispute resolution (ADR), a technique for the resolution of disputes outside the courts. Arbitration has become very important in the business world and certainly a common feature in international and domestic commercial transactions. It is therefore not unusual to find an arbitration clause in most commercial agreements as a key component of how disputes are to be resolved.
The purpose of an arbitration clause was well enunciated in the case of SINO-AFRIC AGRICULTURE & IND COMPANY LTD V. MINISTRY OF FINANCE INCORPORATION & ANOR (2013) LPELR-22370 (CA) where the learned judge stated that:
"Arbitration Clause is intended to save both parties the time and expense of a lawsuit. Other notable reasons are that it may lessen the risk of punitive damages awards, may decrease exposure to class actions or other forms of aggregate litigation, may result in more accurate outcomes because of arbitrator expertise and incentives, may better protect confidential information from disclosure, enhance the ability of the parties to have their disputes resolved using trade rules and it may enable the parties to better preserve their relationship. It may also provide a neutral forum”. The judge went further to state the effect of including an arbitration clause in an agreement thus: “If the contract contains an arbitration clause stating that either party to the contract may choose arbitration instead of litigation, it may not matter that the word "may" was used to try and make arbitration optional instead of mandatory. It is established that in approaching the question of construction it was necessary to inquire into the purpose of the arbitration clause. In choosing arbitration the parties showed an intention to have their disputes decided by an arbitrator which they had chosen." Per ORJI-ABADUA, J.C.A. (Pp. 32-33, paras. E-C).
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KEY FEATURES OF ARBITRATION CLAUSES
For parties to have an effective means of resolving their disputes in an arbitration proceeding, the arbitration clause of the contract is very important. In drafting the clause, careful thought needs to be given to its contents and the following are some of the things to consider.
How to commence the arbitration
Arbitration clause should specify how the arbitration is to be commenced, notice to be given and who and how such is to be given.
Seat of arbitration
The seat is the place or venue the arbitration is to be held. The arbitration clause should state the seat. The seat chosen will determine the applicable procedural rule that will govern the arbitration. The procedural rule of the country in which the seat is situated will apply. It is therefore important to give careful thought to this before making a choice. The attitude and support provided by the domestic courts need to be considered too. Also, important is the enforceability of an arbitral award is the seat chosen. For enforcement purpose, it is important that the country is a party to the New York Convention on enforcement of arbitral awards, before that convention can apply.
Number and method of appointing the arbitrators
It is important to specify the number and state the method of appointing the arbitrators. Most arbitral tribunals have one or three arbitrators, though there is nothing stating different number of members cannot be appointed. Oftentimes, the value and complexity of the contract determine the number of arbitrators to specify. The clause should also specify method of replacement, which may be required due to death, resignation, removal, and illness of an arbitrator or for any other compelling reason.
Language of arbitration
It is always good practice to specify the language of the arbitration. This will also help in choice of arbitrators that are comfortable with that language and help in avoiding cost of translation.
Type of Arbitration
The clause will need to make clear whether it is an institutional arbitration or an adhoc one. Institutional arbitrations are administered and supervised by recognized arbitral institution such as the ICC.
The law governing the subject of the dispute, sometimes termed the substantive law has to be specified. The parties should decide on the law they wish to apply to any dispute that arises and the tribunal will apply that law to the merits of the dispute. This may not necessarily be stated as part of the arbitration clause, but it is helpful to still state it somewhere in the contract as it helps the arbitrators to determine which law applies to the subject-matter of the dispute.
REASONS WHY ARBITRATION IS PREFERRED IN COMMERCIAL TRANSACTION
Enforceability: The ability to resolve disputes in a neutral forum and the enforceability of binding decisions are often cited as the main advantage of arbitration. The principal instrument governing the enforcement of commercial international arbitration agreement awards is the “United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958”(New York Convention) which has been ratified by more than 140 countries, including most countries involved in significant international trade and economic transactions. For example, United States of America, United Kingdom, Canada are all signatories to the New York Convention(with notable exceptions like Iraq, which, not having ratified the New York Convention, cannot be assumed to give effect to arbitration decisions rendered in other countries). The convention requires the states that have ratified it to recognize and enforce international arbitration agreement and foreign arbitral awards issued in other contracting states. As a practical matter, what that means is that an international award originating in a country that is a party to the New York Convention may be enforced in any other country that is also a signatory as if such were actually rendered by the domestic courts in that second country. Nigeria is a signatory to the New York convention. Local legislations have also given confidence to the use of arbitration to settle disputes instead of loading our ever busy courts with disputes that can be resolved alternatively.
Fit for Purpose: Resolution of disputes in the ordinary courts is subject to the rules of the court and is administered by judges appointed by the state. Litigants have little input into how those judges are appointed, the rules governing their procedure, the venue of the trial, those who can attend the proceedings, and other things involved in the administration of justice. On the other hand, the flexibility of arbitration, which allows parties to make substantial input into arbitration proceeding, makes it a more attractive proposition, especially in commercial transactions. Parties appoint their arbitrators, determine the rules, decide on the fees of the arbitrators and do many more to make it fit for purpose. It is usually simpler, more efficient, and more flexible for scheduling than litigation.
Avoids hostility: Because the parties in an arbitration are usually encouraged to participate fully and sometimes even to help structure the resolution, they are often more likely to work together peaceably rather than escalate their anger and hostility towards one another, during and after the arbitration, as is often the case in litigation.
Professional: Parties to arbitration are at liberty to appoint arbitrators who are experts and professionals in the subject matter of the dispute. This is very important in any business environment as those appointed understand the issues at stake better and are at a better position to reach a quick and more acceptable decision to the satisfaction of parties. Arbitration is not hamstrung by strict adherence to the sometimes time consuming and confusing rules of evidence and procedures.
Simplified rules of evidence and procedure: The often-convoluted rules of evidence and procedure do not apply in arbitration proceedings, making them less stilted and more easily adapted to the needs of those involved. Importantly, arbitration dispenses with the procedure called discovery that involves taking and answering interrogatories, depositions, and requests to produce documents - often derided as a delaying and game-playing tactic of litigation. In arbitrations, most matters, such as who will be called as a witness and what documents must be produced, are handled with a simple phone call.
Faster than litigation: Arbitration is faster. This is because decisions are reached quicker without any preliminary objection or unnecessary appeal. There have been instances in the regular courts where preliminary matters alone can take up years before the substantive matter is heard.
Confidential: Arbitration proceedings are generally held in private. This is important in most corporate and business cultures. And parties sometimes agree to keep the proceedings and terms of the final resolution confidential. Both of these safeguards can be a boon if the subject matter of the dispute might cause some embarrassment or reveal private information, such as a company's client list or trade secret.
An arbitration based on a well thought out arbitration clause is more likely to result in timely justice than court litigation. In the mind of business people, most legal disputes are cost centers and the sooner they end the better. Further, as the public justice system of large metropolitan areas continue to be cash strapped and forced to reduce employee and services thereby lengthening the time it takes to get to trial, more businesses will opt out for private justice system of arbitration and mediation.
Business is all about managing towards an objective, i.e. profitability, and that includes reducing uncertainty caused by delays. A business wants disputes resolved reasonably quickly and wishes the resolution of disputes to cause as little disruption to its core business and employees as possible. Failure to incorporate a business-oriented arbitration clause leaves too many decisions up to parties mired in the midst of dispute. It is better to create the framework for dispute resolution when the parties are at the beginning of a contract. A good arbitration clause can foster timely justice.