The Arbitration Clause Most Companies Sign Without Reading — and Why It Matters

The clause at the back of the contract

Most international commercial contracts include an arbitration clause. Most of those clauses were copied from a previous contract, which was copied from a previous contract, which was drafted by someone who left the firm seven years ago. The parties sign. The deal closes. And if a dispute arises three years later, everyone learns — for the first time — what the clause actually says.

This article explains the four decisions that actually matter in an international arbitration clause, and why the defaults are often wrong.

1. The seat is everything

The legal seat of the arbitration determines which courts have supervisory jurisdiction, which procedural law applies to the arbitration itself, and where an award can be challenged or set aside. London, Paris, Singapore, Hong Kong, and Geneva are the most common seats in international contracts. Each has a well-developed arbitration law based on the UNCITRAL Model Law. Each has courts that generally support arbitration and will not second-guess the tribunal’s merits decisions.

Choosing a seat in a jurisdiction with an underdeveloped arbitration law — or one whose courts are hostile to arbitration — can undo years of careful drafting. The seat is the single most important word in the clause. Do not let it default.

2. Institutional rules vs. ad hoc

The major institutions — ICC, LCIA, SIAC, HKIAC, ICDR — provide administered arbitration with published rules, institutional oversight, and a secretariat that manages the procedural calendar. Ad hoc arbitration under the UNCITRAL Rules has no institution; the parties and the tribunal manage everything themselves.

Administered arbitration costs more but reduces the risk of procedural deadlock. Ad hoc arbitration costs less but requires more cooperation between the parties and the tribunal — cooperation that may not survive the dispute that brought them there. For most cross-border commercial contracts, an administered arbitration under a recognized institution is the safer choice.

3. The number of arbitrators — and how they are appointed

A sole arbitrator is cheaper and faster. Three arbitrators are more expensive and slower but reduce the risk of a single idiosyncratic decision-maker. For disputes over a certain value — say, above $5 million — three arbitrators are the market standard. The appointment mechanism matters at least as much as the number. A clause that says “each party appoints one arbitrator and the two party-appointed arbitrators appoint the chair” is standard, but it can break down if one party refuses to appoint or the two party-appointed arbitrators cannot agree on a chair. A well-drafted clause specifies a default appointing authority — typically the institution — to break the deadlock.

4. The governing law of the contract vs. the law of the arbitration

The governing law of the contract (say, English law or New York law) is not the same as the law of the arbitration (the lex arbitri, determined by the seat). The contract’s governing law determines the substantive rights and obligations. The law of the arbitration determines the procedural framework and the grounds for challenging the award. The two should be chosen independently and explicitly. A clause that says “governed by English law, seat London” has said two separate things; a clause that says “governed by English law” has said only one.

The takeaway

An arbitration clause is a prenuptial agreement for a commercial relationship. It is written when everyone is getting along and invoked when they are not. The time to negotiate it is before the dispute exists. After that, it is too late.

This article is provided for general information only. It is not legal advice and does not create an attorney-client relationship.