THE MIDNIGHT DISASTER OF DEFECTIVE ARBITRATION AGREEMENTS
Arbitration agreements are often referred to as ‘midnight clauses’. That is the category of clauses that are negotiated, if at all, at the 11th hour, when the parties are in a rush to close a transaction.
Perhaps because arbitration agreements are commonly one of the last contractual terms to be finalised and may be perceived as a boilerplate provision, parties fail to ensure that their arbitration agreement is effective. Unfortunately, this situation is often compounded by many transactional drafters being unaware of the importance of the wording of an arbitration agreement which usually falls to colleagues dealing with contentious issues. Accordingly, such drafters do not engage the assistance of expert arbitration counsel when finalising such agreements.
As a result, defective or ‘pathological’ arbitration agreements are, unfortunately, relatively common.
Such pathological clauses can add enormous expense and delay to an arbitration, and more importantly, may deprive the parties of the opportunity to bring a dispute to arbitration at all. These consequences of a defective arbitration agreement can be avoided by careful drafting, clearly specifying all the key elements of a valid arbitration agreement, as well as staying clear of any potential pitfalls.
Objectives and content of an agreement to arbitrate
A well-drafted arbitration agreement provides a roadmap for the effective administration of any dispute that may arise. This is important since once a dispute arises, parties commonly are unable to reach an agreement on anything, let alone a mechanism to resolve the dispute.
Apr-Jun 2020 issue
King & Spalding LLP