International Contracts Frequently Include Arbitration Clauses: Why and How?
In today`s global economy, international contracts have become a common practice for businesses of all sizes. These contracts are often complex and involve various legal and regulatory requirements, making it essential to ensure that any disputes that arise are resolved in a timely and effective manner.
One solution that many international contracts often employ is including an arbitration clause. So, what is arbitration, and why is it frequently included in these types of contracts?
What is Arbitration?
Arbitration is a legal process for resolving disputes outside of the traditional court system. In arbitration, a neutral third party, or arbitrator, is selected to hear both sides of an argument and make a binding decision. It is a private and confidential process, and the decision is usually final and cannot be appealed.
Why Include an Arbitration Clause in International Contracts?
There are several reasons why arbitration clauses are frequently included in international contracts:
1. Avoids local court systems: International contracts often involve parties from different countries, and disputes can arise in any of those countries. In such cases, opting for an arbitration clause can avoid getting entangled in foreign court systems and unfamiliar legal procedures. Arbitration clauses protect international businesses from the risk of local bias, legal procedures, and language barriers.
2. Saves time and money: Arbitration is generally a more efficient and cost-effective process than traditional court proceedings. With arbitration, disputes can be settled much quicker than in court and are less likely to run into unforeseen delays. Therefore, the parties avoid incurring the cost of court fees, filing paperwork, and attorneys` fees.
3. Provides confidentiality: One of the key advantages of arbitration is the confidentiality of the proceedings. Unlike court proceedings, which are public, the arbitration process is private and confidential. This can be especially important in international markets, where businesses may want to avoid damaging their reputation or disclosing sensitive information.
4. Increases predictability and certainty: When parties opt for arbitration, they have more control over the process and outcome. They can customize the proceedings to suit their needs, select impartial arbitrators, and agree on the rules of the arbitration. This predictability and certainty are especially important for businesses looking to protect their interests and investments in foreign markets.
How to Draft an Arbitration Clause?
If you are looking to draft an arbitration clause for your international contract, here are some essential elements to include:
1. The scope of the clause: Clearly define which disputes the arbitration clause applies to and which ones it does not.
2. The governing law and arbitration rules: Specify which laws and rules will govern the arbitration process.
3. The language of the arbitration: Determine the language that arbitration proceedings will be conducted in to avoid any misunderstandings.
4. The number of arbitrators: Decide on the number of arbitrators required to resolve disputes.
5. The seat of the arbitration: Choose a neutral location for the arbitration proceedings.
6. Confidentiality: Include provisions on confidentiality to ensure that the arbitration proceedings and the decision remain confidential.
International contracts frequently include arbitration clauses due to the many advantages it offers. The inclusion of these clauses in international contracts can save time and money, provide confidentiality, increase predictability and certainty, and avoid the complications of local court systems. When drafting an arbitration clause, businesses must ensure that they carefully consider the scope, governing law, language, number of arbitrators, seat of the arbitration, and confidentiality provisions. Overall, arbitration clauses are an essential tool for businesses looking to mitigate the risks and complexities of international trade.