The arbitration clause in commercial contracts: how to draft it precisely

An arbitration clause is usually written at the end of the contract and read at the first dispute. Between the writing and the reading, months and large costs can be lost over a missing word or a contradictory wording. The aim of this article is to let you know what to ask before the clause is adopted in your contract.

Many businesspeople prefer it because the parties choose the arbitrators, the procedure and the language; because the decision is not appealed in the usual way; and because confidentiality is broader than in court proceedings. But these advantages do not come automatically; they depend on the agreement being valid and tightly drafted.

Not every commercial contract needs arbitration. Look at the value and technical nature of the contract, whether there is an international element, how sensitive confidentiality is, the need for sector expertise, whether the award may need to be enforced outside the Kingdom, the cost of the procedure, and the number of disputes expected. For small, repeated contracts the courts may be more efficient; in complex or multi-party deals arbitration may be more suitable.

• Writing: the Arbitration Law requires the arbitration agreement to be in writing, whether in the contract itself or in a separate document it refers to.
• Certainty: it must be clear that the parties agreed on arbitration instead of the courts, not left uncertain.
• Capacity: the person signing the contract must be authorised to agree to arbitration on behalf of the party he represents.
• Government bodies: public bodies resort to arbitration only under their own statutory controls, so check them before you adopt the clause.

• Scope of the clause: does it cover "any dispute arising out of or relating to the contract", or only specified types? Narrow drafting opens the door to a dispute over whether a given disagreement is within arbitration at all.
• The seat: important because it determines the court competent over proceedings connected with the arbitration, such as an annulment action.
• Number of arbitrators: preferably odd (one or three) to avoid a tied vote and any statutory problem.
• The institution or rules: institutional arbitration through an accredited centre provides ready rules and a system for appointing arbitrators; ad hoc arbitration gives you more flexibility but requires more precise drafting.
• The language of arbitration and the governing law.
• The duration of the proceedings and how costs are allocated.
• Confidentiality and interim measures.

The seat of arbitration is a legal concept, not just the city where meetings are held. It is tied to the judicial framework that supports the arbitration, and to matters such as the annulment action. Write "seat of arbitration" expressly, and do not leave the wording open to the reading that it means only the place of hearings.

Fix the language early, especially if the documents and the executive team work in different languages; a simple phrase such as "the English language" affects translation, cost, witnesses, experts and how documents are presented. As for the number, a sole arbitrator usually reduces cost, and three may suit high-value or multi-disciplinary disputes. The number can be left to the institutional rules or tied to the value of the dispute, but avoid a complex mechanism for forming the tribunal that conflicts with the rules you chose.

A multi-stage clause is useful if each stage has a clear time limit, and if the clause says whether it is a condition precedent to starting arbitration. A loose phrase such as "the parties shall negotiate amicably", with no period or effect, may create a procedural argument instead of supporting settlement.

One of the most frequent is a clause saying a dispute is referred to arbitration "or to the competent court". This contradiction does not lead to a single forum; it opens a preliminary dispute over which was meant. Choose one clear path, and if you want escalation, write it: direct negotiation, then mediation, then arbitration, with a period for each stage.

If you choose institutional arbitration, use wording consistent with the rules of the institution you named, and name it precisely. It is best to start from the model clause the institution publishes and then add only the necessary options: the seat, language, number of arbitrators, the governing law if needed, and any prior stage. Anything beyond that should have a practical reason.

An award issued by the tribunal is not appealed in the usual way, and it can be challenged by an annulment action before the competent court within the period and on the grounds set by the law. To enforce it, an enforcement order is requested from the competent court and the matter then goes to the enforcement judge. Think about this stage while you write the clause, not after the dispute.

• Does each party understand that arbitration replaces the courts, not sits beside them?
• Does the clause cover the contract, the annexes and the disputes connected with it?
• Are the place, rules, language and number of arbitrators fixed?
• Can you bear the cost of arbitration if the contract value is small?
• Does the clause fit the rest of the contract, such as the jurisdiction clause?

The question is not "is arbitration good?" but: will this clause work when the parties are at their most bitterly opposed? If interpreting it needs a page, it may need redrafting.