Written by Nicolas Tang
Most commercial contracts contain a dispute resolution clause, and in many cross-border agreements, that clause provides for arbitration. An arbitration clause is one of the most important provisions in any contract, yet it is also one of the most frequently overlooked by parties who are not legally trained.
This article explains what an arbitration clause is, what its key terms mean, what to expect if you already have one in your contract and a dispute arises, and what the arbitration process looks like.
1. What Is an Arbitration Clause?
An arbitration clause is a contractual provision in which the parties agree that disputes arising out of or in connection with the contract will be resolved by arbitration rather than through the courts. It is the foundation of any arbitration: without a valid arbitration clause (or a separate arbitration agreement), neither party can compel the other to arbitrate.
Arbitration clauses are typically included in the contract at the time of signing, before any dispute has arisen. Once a dispute arises, the clause operates as the parties’ binding agreement to submit the matter to arbitration and, in most jurisdictions, prevents either party from commencing court proceedings on the same dispute.
The clause is treated as a separate agreement from the rest of the contract. This is known as the doctrine of separability: even if the underlying contract is found to be invalid, the arbitration clause may still be enforceable on its own. This principle is recognised in most arbitration-friendly jurisdictions, including Singapore and Hong Kong, and is reflected in the UNCITRAL Model Law on International Commercial Arbitration.
2. Why Arbitration Clauses Matter
The practical significance of a well-drafted arbitration clause cannot be overstated. It determines:
- Where the dispute will be resolved (the “seat” of arbitration, which also determines the supervisory court);
- Who will resolve it (how many arbitrators, and under which institution’s rules they are appointed);
- How the process will be conducted (the procedural rules, language, and applicable law); and
- Whether the resulting award will be enforceable internationally (an award made under a recognised institution and seated in a New York Convention signatory state can be enforced in over 170 countries).
A poorly drafted clause, by contrast, can result in costly preliminary disputes about jurisdiction, competing court proceedings, and delays that undermine the very advantages arbitration is meant to provide.
3. Key Elements of an Arbitration Clause
While the specific requirements vary by institution and jurisdiction, a well-drafted arbitration clause should address the following:
Scope of disputes
The clause should clearly define which disputes are covered. Most model clauses use broad language such as “any dispute arising out of or in connection with this contract” to ensure comprehensive coverage, including disputes about the contract’s existence, validity, or termination.
Arbitral institution
Specifying a recognised arbitral institution (such as SIAC, HKIAC, ICC, or LCIA) ensures that there is an established set of procedural rules, a mechanism for appointing arbitrators if the parties cannot agree, and administrative support for the proceedings.
Seat of arbitration
The seat is the legal “home” of the arbitration. It determines which country’s arbitration law applies to the proceedings, which courts have supervisory jurisdiction, and where any application to set aside the award would be made. Common seats for Asia-Pacific disputes include Singapore and Hong Kong. The seat need not be the same as the physical location of hearings.
Number of arbitrators
Most clauses specify either a sole arbitrator or a tribunal of three. A sole arbitrator is typically more cost-effective and faster, while a three-member tribunal is common for higher-value or more complex disputes.
Language of the arbitration
This is particularly important in cross-border contracts where the parties may operate in different languages.
Governing law of the arbitration agreement
The law governing the arbitration clause itself (as distinct from the law governing the substantive contract) determines questions of the clause’s validity, scope, and interpretation. This is often overlooked but can become decisive in contested cases.
More information:
The governing law of the arbitration agreement is distinct from both the substantive law of the contract and the law of the seat. In most cases, parties select the same law for all three, but this is not always the case. Where the clause is silent, courts may need to determine the applicable law by reference to the law of the seat or the law of the main contract. Recent case law in both Singapore and England has highlighted the importance of specifying this expressly to avoid satellite litigation over which law governs the clause.
4. If You Have an Existing Arbitration Clause in Your Contract
If you have signed a contract that contains an arbitration clause and a dispute has arisen (or is looking likely), the clause will shape what comes next. Here is what you should expect.
You generally cannot go to court instead
In most jurisdictions, if your contract contains a valid arbitration clause, a court will decline to hear the dispute and will direct the parties to arbitration. This applies even if you would prefer to litigate. If one party files a court claim despite the clause, the other party can apply to have the proceedings stayed (paused or dismissed) in favour of arbitration. Courts in Singapore and Hong Kong routinely grant such applications.
The clause tells you the process
Go back to your contract and identify the key terms in the clause (as outlined in section 3 above). In particular, look for:
- The institution and rules: This tells you where to file a Notice of Arbitration and which procedural rules will govern the process;
- The seat: This tells you which country’s courts have supervisory jurisdiction and which arbitration law applies;
- The number of arbitrators: This affects cost and timing (a sole arbitrator is typically faster and cheaper); and
- The language: This determines the language in which submissions, hearings, and the award will be conducted.
If any of these are missing or unclear, the institution’s rules will usually provide a default mechanism, but ambiguity can add time and cost.
You will need to commence arbitration formally
Arbitration does not start automatically when a dispute arises. The claimant must file a Notice of Arbitration with the institution named in the clause, setting out the nature of the dispute, the relief sought, and the basis for the tribunal’s jurisdiction. Most institutions have prescribed forms or templates for this purpose. Time limits may also apply: some clauses or governing laws impose limitation periods, and delay can affect your position.
The other side may have the same rights
The arbitration clause is mutual. If you are considering whether to commence arbitration, bear in mind that the other party has the same right to do so. If a dispute is escalating, it is worth considering whether to take the initiative rather than wait.
More information:
In some contracts, the arbitration clause forms part of a multi-tiered dispute resolution mechanism that requires the parties to attempt negotiation or mediation before commencing arbitration. If your clause contains such a requirement, failing to comply with the preliminary steps may give the other side grounds to object to the arbitration, though the practical consequences vary by jurisdiction and the wording of the clause.
5. What Does the Arbitration Process Look Like?
If you have reached the point where arbitration is the next step, it helps to have a broad sense of what the process involves. While the details vary depending on the institution, the rules, and the complexity of the dispute, most arbitrations follow a similar sequence.
- Commencement: The claimant files a Notice of Arbitration with the institution named in the clause, setting out the nature of the dispute and the relief sought. The respondent then files a response.
- Constitution of the tribunal: the arbitrator or arbitrators are appointed in accordance with the clause and the institution’s rules. This may involve each party nominating one arbitrator, with the two nominees agreeing on a presiding arbitrator, or the institution making the appointment directly.
- Written submissions and evidence: Both parties exchange written statements of their case, submit documentary evidence, and file witness statements. This phase is broadly comparable to the pleadings and discovery stages in court litigation, though the scope of document exchange in arbitration tends to be narrower.
- Hearing: The tribunal conducts an oral hearing at which the parties present their arguments, examine witnesses, and address questions from the tribunal. Hearings may take place in person at the seat of arbitration, or virtually if the parties and tribunal agree.
- Award: After considering all the evidence and submissions, the tribunal issues a binding award. The award sets out the tribunal’s reasoning, its decision on each claim, and its determination on costs. In most cases, the award is final and not subject to appeal on the merits.
The entire process can take anywhere from a few months (under expedited or streamlined procedures) to over a year for larger, more complex disputes. Throughout, the process is private and confidential.
If you are facing a dispute and want to understand how your arbitration clause will work in practice, or if you need guidance at any stage of the process, Farallon Law Corporation regularly assists clients with arbitration matters across Singapore, Hong Kong, and the wider Asia-Pacific region.
For advice on your arbitration clause or an ongoing dispute, contact Farallon Law at info@fl.sg.