DEFECTIVE ARBITRATION CLAUSES:
AN OVERVIEW
Badrinath Srinivasan
05.07.2015
(A version of this paper was published in the Indian Institute of Quantity
Surveyors Annual Insight 2015, p. 52-53)
Electronic copy available at: http://ssrn.com/abstract=2664882
Table of Contents
Introduction ................................................................................................................................ 3
What are Pathological Arbitration Clauses? .............................................................................. 3
Instances of Defective Arbitration Clauses................................................................................ 4
Approaches of Courts in Dealing with Defective Arbitration Clauses ...................................... 5
Consequences of Defective Arbitration Clauses........................................................................ 6
Conclusion ................................................................................................................................. 6
Electronic copy available at: http://ssrn.com/abstract=2664882
DEFECTIVE ARBITRATION CLAUSES: AN OVERVIEW
Badrinath Srinivasan*
Introduction
Quantity surveyors operate in the entire spectrum of construction activities ranging from
preparing the estimates for a construction project till conducting and participating in
arbitration and litigation arising out of a construction project. 1 Gone are the days when it was
thought that measurement was the chief competence of Quantity Surveyors.2 Quantity
surveyors have an important responsibility of being aware of the laws applicable to the
project.3 Since they are involved in preparing the tenders and contracts, negotiating contracts
and handling disputes, Quantity Surveyors are expected to play an important role in ensuring
that the project proceeds smoothly without being affected by issues. From a legal stand point,
their role is both preventive and curative. Under the prevention role, their task is to ensure
that that the applicable laws, especially those pertaining to planning, building, taxation and
employment, are complied with and the tender/ contract document addresses the pertinent
legal risks. The curative role played by Quantity Surveyors comes into play after a dispute/
legal issue arises. In such a situation, the Quantity Surveyor is expected to handle, or aid the
lawyers handling the issue. The role, in such cases, would be to act as a link between the
techno-commercial team and the lawyers considering the Quantity Surveyor’s expertise in
law and techno-commercial aspects of construction.
This short paper addresses an important aspect of the aforementioned preventive role that a
Quantity Surveyor may have to don- drafting proper arbitration clauses. Although the
exercise of drafting arbitration seems straightforward, the history of arbitration has exposed
the folly of humankind in failing to learn lessons from the past. Numerous cases are reported
every year relating to defective arbitration clauses. This short paper provides a brief overview
of defective or pathological clauses in arbitration.
What are Pathological Arbitration Clauses?
The expression “pathological clauses” is used to denote defective or badly drafted arbitration
clauses.4 The expression was first used by Frederic Eisemann in 1974 5 and has since become
a popular phrase in international commercial arbitration.
* LL.M., A.I.I.I., M.C.I.Arb. The author is currently working in a Public Sector Undertaking in India. Views
stated herein are personal. The author can be contacted at lawbadri@gmail.com.
1
http://www.ciqs.org/english/designations-defined-professional-quantity-surveyor (accessed on 4 Jul 2015).
2
Duncan Cartlidge, Quantity Surveyor’s Pocket Book, Butterworth-Heinemann (2009), p. 8.
3
Ainul Jaria Maidin & Siti Sarah Sulaiman, Importance of Legal Education for Quantity Surveying
Professionals: A Proposal For Developing A Legal Studies Module for Malaysian System, 7 Journal of Applied
Sciences Research 2249-2256 (2011).
4
Emmanuel Gaillard & John Savage (Eds.), Fouchard, Gaillard, Goldman on International Commercial
Arbitration, Wolters Kluwer (1999), p. 262.
5
Frederic Eisemann, La clause d’arbitrage pathologique, in Commercial Arbitration- Essays in Memoriam
Eugenio Minoli (1974), p. 129.
Such clauses are not uncommon as arbitration clauses are generally agreed at the end of
contract negotiations due to which parties pay less attention to the details of such clauses. For
this reason, a popular commentary referred to arbitration clauses as “midnight clauses”.6
Instances of Defective Arbitration Clauses
While an arbitration clause may touch upon several aspects such as pre-arbitral procedures
(such as negotiations, mediation, etc.), specific disputes to be referred to arbitration, number
of arbitrators, seat of arbitration, time limit within which arbitrators should decide, finality of
arbitral awards, procedure to be followed by the arbitrator etc., there are certain essentials
that an arbitration clause should possess. These essential contents will differ depending on the
nature/ type of arbitration. Defective arbitration clauses are clauses which lack in one or some
of the essential elements of an arbitration clause.
Some of such common defects found in arbitration clauses are briefly discussed below7:
Reference to Non-Existent Arbitral Institutions: Here, the parties agree in their
arbitration clause to refer their disputes to an arbitral institution which is non-existent.
In a recent case, for instance, the parties agreed to refer their disputes to the Singapore
Chamber of Commerce.8 The court found that there was no institution administering
arbitration under such name.9
Reference to Non-Existent Rules: In this scenario, parties agree for arbitration under
non-existent rules. In System for International Agencies v. Rahul Coach Builders Pvt.
Ltd.10, the parties agreed to arbitration under the “by-laws of Indian Company's Act
1956” or “as per International Trade Laws”. The rules under which the arbitration had
to be conducted did not exist.
Reference to Arbitrators who are no more alive at the time of dispute: An arbitration
clause may provide for reference of a dispute to an arbitrator but when disputes arise,
the arbitrator may not be alive. ACC Limited v. Global Cements Ltd.11 is a case in
point. Here, the arbitration clause provided for arbitration by either of the two persons
who were both dead when disputes arose.12
Unworkable Arbitration Clauses: In this type of defect, the arbitration clause provides
for arbitration under an arbitral institution but mandates that the arbitration has to be
conducted under arbitration rules of some other arbitral institution or arbitration rules
6
Alan Redfern & Martin Hunter with Nigel Blackaby & Constantine Partasides, Law and Practice of
International Commercial Arbitration, Sweet & Maxwell (2004), p. 156.
7
Gary B Born, International Commercial Arbitration, Wolters Kluwer (2009), p. 675-694
8
Pricol Ltd. v. Johnson Controls Enterprises Ltd. (2015) 4 SCC 177: MANU/SC/1165/2014
9
Also see, Lucky-Goldstar International (HK) Ltd. v. Ng Moo Kee Engineering Ltd. [1993] 1 HKC 404 (Hong
Kong High Court); In Re: Arbitration between C.M. Karanji & Co. (India) v. Indo-China Trading Co., Ltd.
CWN 763: MANU/WB/0403/1951; In the Matter of the Arbitration between Laboratorios Grossman, S. A.,
Appellant, and Forest Laboratories, Inc., 31 A.D.2d 628 (1968)
10
MANU/SC/0145/2015
11
AIR 2013 SC 3824: MANU/SC/0489/2012
12
There are instances where parties have agreed to refer disputes to certain institutions which ceased exist when
disputes arose. See, Gary B Born, International Commercial Arbitration, Wolters Kluwer (2009), p. 683.
inconsistent with the rules of the arbitral institution. For instance, in Insigma
Technology Co. Ltd. v. Alstom Technology Ltd13, parties agreed to refer disputes to
arbitration before the Singapore International Arbitration Centre but in accordance
with Rules of Arbitration of the International Chamber of Commerce. This is the case
where the ICC Rules, which are the arbitration rules of the ICC’s International Court
of Arbitration, but the arbitration was to be conducted by Singapore International
Arbitration Centre, an institution similar to ICC.
Reference of Disputes to Arbitration as well as Courts: At times, parties agree to refer
disputes to arbitration under valid clauses but also agree contradictorily that courts of
a certain country or city would have the exclusive jurisdiction over disputes.14
Incomplete Arbitration Clauses: Courts generally look for an unequivocal intent to
arbitrate. From this perspective, the arbitration clause must employ mandatory
language (such as “shall” or “will”) to convey parties intent to refer disputes to
arbitration. Failure to do so would make the arbitration clause defective. In
Wellington Associates Ltd. vs. Kirit Mehta15, the agreement contained an exclusive
jurisdiction clause and also provided that any dispute “may” be referred to arbitration.
On a combined reading of both clauses, the court concluded that reference to
arbitration was optional and parties had to mutually agree to refer the dispute to
arbitration.16
Approaches of Courts in Dealing with Defective Arbitration Clauses
In case of disputes under agreements containing defective arbitration clauses, the parties,
especially, the party invoking arbitration has no other choice but to approach courts in getting
the matter referred to arbitration as the party lacks the inherent ability to force the other side
to proceed with the arbitration. Courts encountering flawed arbitration clauses generally
adopt one of three approaches enumerated below:
1. Courts hold the arbitration clause to be invalid or unenforceable for vagueness. In a
recent decision in System for International Agencies v. Rahul Coach Builders Pvt.
Ltd.17, the parties agreed to arbitration under the “by-laws of Indian Company's Act
1956” or “as per International Trade Laws”. The Supreme Court of India held that
there was no arbitration clause since the same was vague.
2. Courts sever the defective part from the part which provides for resolution of disputes
through arbitration and enforces the valid part of the arbitration clause. In Lucky-
Goldstar International (HK) Ltd. v. Ng Moo Kee Engineering Ltd.18, the parties
agreed to refer their disputes to arbitration under the rules of “procedure of the
13
[2009] 1 SLR 23: [2008] SGHC 134
14
Also see, AEZ Infratech Pvt. Ltd. v. SNG Developers Ltd. 2014 (143) DRJ 616: MANU/DE/1383/2014 ; Paul
Smith Ltd. v. H & S International Holding Co. Inc., [1991] 2 Lloyd‘s L.Rep., 127; P. T. Tri-M.G. Intra Asia
Airlines v Norse Air Charter Limited, [2009] SGHC 13
15
MANU/SC/0232/2000 : (2000) 4 SCC 272;
16
Also see, Lobb Partnership Ltd. v. Aintree Racecourse Co. Ltd. [2000] BLR 65
17
MANU/SC/0145/2015
18
[1993] 1 HKC 404 (Hong Kong High Court)
International Commercial Arbitration Association”. There was no such association.
The High Court of Hong Kong severed the defective part and referred the parties to
arbitration under the laws of the seat of arbitration chosen as per the arbitration
clause.
3. Court re-write the defective part of the arbitration clause by supplying meaning that is
most reasonable in the context of the arbitration clause. In Pricol Ltd. v. Johnson
Controls Enterprises Ltd. & Ors.19, for example, the Supreme Court of India referred
the parties to arbitration under the arbitration rules of the Singapore International
Arbitration Centre even when the parties provided for reference to arbitration under
the arbitration rules of Singapore Chamber of Commerce. Although there was no such
arbitral institution, the Supreme Court construed the reference in the arbitration clause
to mean the Singapore International Arbitration Centre.
Consequences of Defective Arbitration Clauses
Although courts in many jurisdictions these days are in favour of enforceability of arbitration
clauses and adopt an interpretation that is in favour of giving effect to arbitration clauses, it is
possible that courts may adopt a diametrically opposite stand. In the latter situations,
pathological clauses could potentially have serious adverse effects. The party which is at the
receiving end of the notice invoking arbitration often takes advantage of these defects to
defeat the salutary objectives of arbitration of efficiency and finality. In such cases, there is
considerable wastage of time and effort in litigating in courts on whether the arbitration
clause is valid or not in courts, often up to the highest court in the relevant jurisdiction. Apart
from considerable wastage of time and effort, the invoking party has to expend substantial
expenses in litigating the matter in court. It is also possible that the party at the receiving end
of the arbitration notice may initiate proceedings in a country other than the one chosen by
the parties in the agreement. This may lead to multiple proceedings in different jurisdictions.
A corollary of this is that multiple proceedings on the subject may lead to inconsistent
decisions on the enforceability of the arbitration clause.
Conclusion
The effectiveness of the arbitration clause may have implications even on the enforceability
of the claim itself. These adverse consequences could be avoided or at least mitigated by
parties through due diligence in framing arbitration clauses. Several measures to prevent
pathological clauses exist. Some of the common methods are the following:
Arbitral institutions generally provide model arbitration clauses along with their rules.
It is prudent to use these clauses considering their universal applicability world over.
While choosing an arbitral institution, it is important for the parties to be aware of the
consequence of such choice on the arbitration proceedings. For instance, the
applicable arbitral rules may provide for appointment of three arbitrators in the
19
(2015) 4 SCC 177: MANU/SC/1165/2014
absence of an agreement to the contrary.20 Appointing three arbitrators in a small
value dispute may not be necessary and would only lead to high costs and delays in
concluding the proceedings.
Before agreeing to an arbitration clause, the parties must exercise due diligence in
choosing an arbitral seat, the arbitral institution, etc. The arbitral seat may contain
mandatory requirements which may be onerous to one of the parties.
Contract law in general and arbitration law in particular should be enacted such that it should
enforce the fair and prudent commercial expectations. In such an ideal scenario, there would
be no need to obtain legal counsel while negotiating agreements. However, practical
situations often necessitate the use of legal counsel. Hence, in negotiating a dispute resolution
clause, it is important for the parties to discuss the consequences of the choices in the
arbitration clause with their lawyers. However, many parties do not do so for multifarious
reasons. Considering the real possibility of such scenarios, it is prudent for the parties to get a
dispute resolution policy drafted and vetted by legal counsel and apply the same while
negotiating agreements. The dispute resolution policy could cover various scenarios and the
possible choices of arbitration clauses depending on the proposals put forth by the other party
to the negotiation. These measures would go a long way in avoiding defective arbitration
clauses.
20
See, for instance, Article 12 of the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of
Commerce, 2010; Article 7(1) of the UNCITRAL Arbitration Rules, 2010.
