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How to write an arbitration clause for offshore outsourcing deals

Stephanie Overby | Sept. 13, 2016
To avoid litigation and headaches, in general, it’s imperative that you incorporate an effective arbitration clause into international outsourcing contracts.

Imprecise language of an arbitration clause in an offshore outsourcing contract can be not only insufficient, but also dangerous. Indeed, one word can make a difference. A classic example of a poorly worded arbitration clause is one that states that all disputes arising between the parties may be resolved by arbitration. “Because arbitrators are authorized to resolve party disputes solely by the terms of the contract, it is necessary that parties use the word ‘shall’ rather than the word ‘may’ in delegating authority to the arbitrators,” Howes says.

“If the contract states that the disputes "may" be resolved by arbitration, it opens up the arbitration to jurisdictional challenges.” Other poorly worried arbitration clauses fail to state where the arbitration will take place or fail to state the language of the arbitration. “While these clauses are enforceable, they are subject to disputes that increase the length and expense of arbitration,” says Howes.

At a minimum, Howes and his fellow attorneys at May Brown recommend that the following information be included in every international arbitration clause:

  • A provision stating that "all disputes arising under or in connection with the agreement shall be resolved" by the rules of a particular international arbitration organization
  • A clear location of arbitration
  • The number of arbitrators involved (typically one or three)
  • The language in which the arbitration process will occur
  • An agreement that any awards issued by the arbitrators "may be enforced in any court of competent jurisdiction"

A number of additional optional provisions should also be evaluated on a contract-by-contract basis, says Howes. Some customers include an expedited arbitration provision, for example. “Expedited arbitration can be very effective in maintaining a good working relationship in outsourcing relationships where numerous disputes involving relatively small amounts of money may arise and—if not quickly resolved—accumulate and put stress on the relationship,” Kriss says.

“The contract can provide for a single arbitrator, an accelerated briefing schedule, no discovery, and resolution within a very short period of time (say, 30 days).”  Each party submits a resolution to the arbitrator, the arbitrator holds a two-hour hearing after reading each side’s brief, and can only chooses the resolution offer he or she deems fairest. “Under this procedure, the parties have an incentive to submit reasonable resolution offers and may be able to settle their dispute quickly without needing a hearing,” says Kriss.

 

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