STUDENT NOTES
Part
6
–
The
Arbitration
Stellenbosch University LLM ICA Module
Agreement
6.1 Definition and Requirements for Validity
An arbitration agreement is essentially a written agreement where parties
agree to submit a dispute to arbitration. In South African law, this is
defined under the Arbitration Act 42 of 1965. However, for international
cases, the more relevant framework is Article 7 of the UNCITRAL Model
Law. The New York Convention also outlines six essential requirements
for the recognition of such agreements, including that the agreement must
be in writing, refer to an existing or future dispute, relate to a defined legal
relationship, and involve a subject matter capable of settlement by
arbitration. Furthermore, the parties must have legal capacity and the
agreement must be valid under applicable law.
Importantly, due to the doctrine of separability (which treats the
arbitration agreement as separate from the main contract), an arbitration
clause can still be valid even if the underlying contract is challenged,
provided the defect relates specifically to the clause itself. Courts generally
uphold arbitration clauses even in asymmetrical agreements, where only
one party has the right to arbitrate.
6.1.2 The Duty to Participate in Good Faith
Entering an arbitration agreement creates not only the duty to refrain
from court litigation (a negative obligation), but also a positive duty to
actively participate in arbitration in good faith. This has been affirmed in
cases like Bremer Vulkan v South India Shipping, where mutual
cooperation was stressed. Modern rules such as the ICC and LCIA Rules
increasingly enforce this duty through cost penalties and sanctions against
obstructive conduct. For example, a party using the courts to delay
arbitration proceedings could face financial consequences in the final cost
apportionment by the arbitral tribunal.
6.2 The Requirement That the Agreement Be in Writing
Most arbitration laws require the agreement to be in writing. The purpose
is not just to prove consent but to ensure clarity in its content. The New
York Convention requires either a signed agreement or an exchange of
communications (e.g., letters or telegrams). Over time, this requirement
has been liberalized. For instance, it is now accepted that written
agreements may include emails or unsigned documents, and even oral
agreements may be valid under certain national laws, such as in New
Zealand.
The 2006 revision of Article 7 of the Model Law clarifies that an
arbitration agreement is “in writing” if its content is recorded in any form,
not necessarily signed. The Zambia Steel case illustrated how an oral
contract could still incorporate a written arbitration clause by reference,
thereby satisfying the writing requirement under English law.
6.2.2 Special Issues in Arbitration Clauses
(a)
Incorporation
by
Reference:
Arbitration clauses may be validly incorporated by referencing another
document, such as a standard form contract. Under the Model Law, a
general reference can suffice, but English courts are more cautious. They
distinguish between "one-contract" and "two-contract" cases, applying
stricter tests where parties did not directly contract together. For example,
Habas Sinai v Sometal recognized incorporation in “one-contract” cases
more easily than in “two-contract” ones.
(b)
Effect
of
Cession
or
Assignment:
Where contractual rights are ceded, whether the arbitration clause
transfers with those rights depends on the legal system. Some systems
allow automatic transfer; others require explicit consent. Best practice is
to state clearly in the main contract how the arbitration clause will apply
in the event of assignment.
(c)
Third
Parties
and
Non-Signatories:
The “group of companies” doctrine and related legal principles (e.g.,
estoppel, agency, assumption) aim to bind or entitle non-signatories in
certain cases. While French and U.S. courts have accepted this doctrine,
English law rejects it unless actual consent is proven. Scholars like
Hanotiau argue that the real question is who the true parties to the
arbitration agreement are, not whether it can be “extended.”
6.3 Arbitrability of Disputes
Objective arbitrability refers to whether the subject matter is suitable
for arbitration (e.g., divorce or criminal cases are not), while subjective
arbitrability deals with whether a party has legal capacity to arbitrate.
Arbitrability issues arise either when enforcing the agreement or the
award. National laws vary in what they allow to be arbitrated—South
Africa, for example, excludes “status” issues from arbitration.
In general, public policy limits arbitrability where the dispute involves
third-party rights, public interest, or exclusive state functions.
Internationally, disputes about patents, family law, and insolvency may
often be considered non-arbitrable. The UNCITRAL Model Law and
national laws (e.g., Germany, Switzerland, India) often provide
guidelines. In insolvency, arbitral claims may be stayed to protect creditor
interests.
6.4 Matters to Consider When Drafting an Arbitration
Agreement
When drafting an arbitration agreement, careful attention must be paid to
clarity, legal enforceability, and practical functionality. While many
arbitration clauses are copied from standard contracts, this can be risky if
they are not tailored to the specific transaction. An effective arbitration
clause should answer several essential questions: What disputes are
covered? Which institution will administer the arbitration? What is the
seat of arbitration? What procedural rules apply? And what language will
be used?
Drafters should aim for a clause that is broad enough to cover all
foreseeable disputes but specific enough to avoid ambiguity. A welldrafted clause should also identify the number of arbitrators, method of
appointment, and possibly even qualifications. Including provisions on
confidentiality, interim measures, and costs can also reduce future
disagreements. Poor drafting, by contrast, can lead to jurisdictional
disputes, delay, or unenforceability.
International instruments like the UNCITRAL Model Clause and
institutional rules (e.g., ICC, LCIA) provide model clauses that can be
adapted for most situations. However, parties should not rely blindly on
templates—contractual context, applicable law, and enforcement risks
must always be considered.
6.5 Pitfalls to Avoid in Arbitration Clauses
There are several recurring drafting errors that can undermine the
effectiveness of an arbitration clause. These include:
•
Pathological Clauses: These are clauses that attempt to refer
disputes to arbitration but are vague, inconsistent, or contradictory.
For example, a clause may refer to arbitration without specifying the
seat or might mention both litigation and arbitration without
clarifying the priority.
•
Omission of Seat: Failure to specify the seat of arbitration can
lead to uncertainty about the applicable procedural law (lex arbitri)
and judicial oversight. Since the seat determines the supervisory
court, it is essential to state it clearly.
•
Ambiguity in Scope: Clauses that do not specify whether they
cover tort claims, misrepresentation, or statutory claims can result
in unnecessary litigation over arbitrability.
•
Non-existent or Inappropriate Rules: Sometimes clauses refer
to defunct institutions or outdated versions of arbitral rules. Always
verify the correct name and version of the institution and rules.
•
Language Issues: A lack of clarity about the language of
proceedings can create practical complications, especially in
multilingual contracts.
Another common issue arises from clauses copied and pasted from prior
contracts, sometimes without understanding the legal consequences or
contextual mismatches. The lesson is clear: arbitration clauses must be
treated as core contractual elements, not afterthoughts.
Final Takeaway: The Strategic Importance of the Arbitration
Agreement
The arbitration agreement is the cornerstone of any arbitration
proceeding. It determines jurisdiction, governs the relationship between
parties and the tribunal, and sets the legal architecture of dispute
resolution. Mistakes in this part of the contract can derail the entire
arbitration process or lead to costly satellite litigation.
Thus, LLM students—and future legal advisors—must approach
arbitration clauses with precision, contextual awareness, and foresight.
This includes staying updated on institutional rules, understanding crossborder legal complexities, and recognizing the interplay between national
laws and international instruments like the New York Convention and
UNCITRAL Model Law.