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The impact of poorly drafted arbitration clauses
As arbitration grows in popularity, the head of arbitration at a leading national law firm cautioned that there has been an increase in the drafting of inadequately considered ambition clauses – an issue that can have significant and far-reaching consequences.
Grace Robbie
Speaking on a recent episode of The Lawyers Weekly Show, Nastasja Suhadolnik, partner and head of arbitration at Corrs Chambers Westgarth, highlighted the growing issue of hastily drafted and poorly considered arbitration clauses. She also warned that these inadequately crafted clauses often lead to severe consequences, including costly disputes, delays, and protracted legal battles – ultimately defeating the core purpose of arbitration.
Suhadolnik discussed how arbitration clauses are frequently treated as an afterthought during contract drafting, with little attention given until they suddenly become a source of a significant problem.
“Arbitration clauses are all too often the last provisions to be negotiated, and then in that sense, we say they’re midnight clauses,” she said.
She explained that by rushing the drafting of arbitration clauses and overlooking their importance, they are not afforded the time or attention needed to fulfil their intended purpose effectively.
“They’re rarely accorded the time and the attention required to ensure that they’re appropriately scoped, that they define the disputes that will be referable to arbitration, and that they achieve the desired result of keeping all of those disputes away from the public eye [and] away from the court system,” she said.
Suhadolnik pointed out that a major reason arbitration clauses are often overlooked is the misguided belief that a one-size-fits-all approach to template clauses is adequate, leading to critical oversights in their drafting.
“It may be simply that there is this impression that template clauses used in some transactions are appropriate for other transactions,” she said.
Moreover, she expressed that “it may be a lack of knowledge of certain key essential components that have to be in a clause”.
Due to poorly drafted arbitration clauses, Suhadolnik explained, they could unravel into a tangled web of inconsistencies, undermining their intended purpose and creating various legal challenges.
“What we get is a melange of things that are internally inconsistent, don’t work as intended, and what that produces then is a protracted dispute in court about how the clause is supposed to operate and if it’s even valid and enforceable,” she said.
Suhadolnik highlighted the surprising prevalence of poorly drafted arbitration clauses, noting that many arbitral institutions routinely urge parties to rely on generic template clauses when uncertain about drafting their own.
“They are quite prevalent. Arbitral institutions advise regularly that parties, when they don’t know how to tailor a clause, should just use a template clause provided by the institution,” she said.
Despite this advice, Suhadolnik noted: “We rarely see the templates being used. Rather, what we often see is [the] convoluted language that produces the opposite result.”
The consequences of a poorly drafted arbitration clause can range in severity, with Suhadolnik noting that, in the most extreme cases, such clauses may be so fundamentally flawed that they become entirely unenforceable.
“So there really is a spectrum of problems parties fall into. It can be on one extreme of the spectrum, a situation where the agreed arbitration clause will be simply unenforceable, and the entire dispute will have to be litigated,” she said.
However, in less extreme cases, Suhadolnik highlighted, a poorly drafted arbitration clause can trigger costly delays and unforeseen complications, ultimately undermining the efficiency arbitration is meant to provide.
“But there are many other scenarios where you won’t face that extreme scenario, but you will end up having to have a fight about how the clause is supposed to operate before you get to arbitration and that will delay the process,” she said.
