Arbitration Agreement - What to Include in an Arbitration Clause

An arbitration agreement is a clause in a contract that requires any disputes arising out of or in relation to the contract to be resolved via arbitration. Arbitration is a private, non-judicial process in which a neutral third party, called an arbitrator, hears the parties' arguments and makes a decision. The award made by the arbitrator is usually final and binding against the parties and thus unappealable, save in instances of procedural irregularity in the arbitration process or if the award is contrary to public policy.

An arbitration agreement can take the form of a standalone agreement or a clause within a contract. It must be in writing, signed by the parties, and must clearly indicate the intention of the parties to submit a dispute to arbitration. However, an arbitration clause in an agreement forms a distinct agreement, such that it is separate from the underlying agreement containing the clause, under the principle of separability. This means that the arbitration clause could still be effective even where the underlying agreement is void for illegality.

For an arbitration agreement to be comprehensive, it must cover the points including a clear reference to arbitration, the seat of arbitration, the scope of dispute, the language of the arbitral tribunal, and the law that will govern the substantive and procedural aspects of the arbitration. In this regard, different laws can apply in respect of the various aspects of the arbitration agreement.

Firstly, there is the law or the relevant legal rules, governing the substantive issues in dispute. The proper law of the contract determines the substantive rights and obligations of the parties concerning the performance of the contract itself.

Secondly, the law governing the arbitration agreement and its performance regulates the interpretation, validity, effect, and discharge of the agreement to arbitrate. It is a mixture of substantive and procedural laws and can be different from the choice of law expressed in the underlying contract.

Thirdly, and most importantly, the law governing the existence and proceeding of the arbitral tribunal; also known as the lex arbitri or curial law. It comprises the rules governing interim measures (such as the obtaining Court Orders for preservation of subject matter), rules empowering the exercise by Courts of supporting measures to assist arbitration, and rules providing for the exercise by the Court of its supervisory jurisdiction over arbitrations.

The procedural law in an arbitration agreement usually adopts the law of the state where the arbitration is legally anchored (i.e. the seat of arbitration), unless expressly stated otherwise. In the case of Compagnie D’Armement Maritime SA v Compagnie Tunisienne De Navigation SA [1971] AC 572 @604B, it was decided:

“An express choice of forum by the parties to a contract necessarily implies an intention that their disputes shall be settled in accordance with the procedural law of the selected forum and operates as if it were also an express choice of the curial law of the contract.”

However, the venue of the arbitration may not necessarily be the same as the seat of the arbitration. The seat of an arbitration can be chosen based on factors such as the procedural law of the country, the law governing challenges to awards, and the country's general attitude towards arbitration.

In circumstances where the arbitration agreement does not expressly provide for the seat of arbitration, it will be determined by the arbitral tribunal having regard to the surrounding circumstances of the case, including the convenience of the parties.

Finally, the parties may also consider the other applicable rules and guidelines as regards the conduct of their arbitration as well as the rules and regulations governing the commercial transaction between them. While this may not be an essential element for an operative arbitration agreement, it may help streamline the dispute resolution process between the parties, making it more efficient.

In conclusion, the parties to a contract should indicate clearly their choice(s) of law for the underlying contract, the arbitration agreement and the lex arbitri to ensure an effective resolution process in the event of disputes. With respect to the recognition and enforcement of the arbitration award, it depends on where recognition and enforcement are sought (usually where the losing party has assets). A typical arbitration award is capable of enforcement in various states under treaty conventions (i.e. the New York Convention with 169 signatories, as at year 2021)

Some of the relevant legislative provisions in Malaysia are:

1. Arbitration Act 2005 (modelled on the UNCITRAL Model Law on International Commercial Arbitration 1985);
2. AIAC Arbitration Rules 2021;
3. Order 69 of the Rules of Court 2012; and
4. Reciprocal Enforcement of Judgments Act 1958.

Here is an example of an arbitration clause:

“The Agreement shall be governed by and construed in accordance with the laws of Malaysia.

Any and all disputes between the parties shall be referred to and finally resolved by arbitration, administered by the Asian International Arbitration Centre ("AIAC"), and in accordance with the AIAC Arbitration Rules 2021. The Parties agree that the seat of the arbitration shall be in Malaysia.

The number of arbitrators shall be three and the language of the arbitration shall be in English.

The arbitration agreement between the parties shall be governed by the Singaporean law.”