Importance of drafting suitable arbitration clauses in commercial contracts.


YJW Wijayatilake

The objective of this article is to emphasise the importance of drafting suitable arbitration clauses in commercial contracts and to consider the requirement of impartiality and independence of arbitrators.

The need to pay more attention to the drafting of the arbitration clause in a contract cannot be over emphasised as the parties have to fall back on the arbitration clause when a dispute arises between them.

In spite of the importance of the arbitration clause quite often adequate consideration is not given to its formulation, often the clause is only considered at the end of the negotiation process of a contract and does not receive sufficient attention. Some call it the “midnight clause” as it happens that the arbitration clause is the last clause considered in the contract sometimes late at night, at the end of a tedious negotiating process. This lack of attention can also be due to the fact that the parties at the stage of considering the arbitration clause are in a state of euphoria at the successful conclusion of a deal and are not in a state of mind to contemplate on disputes that may or may not arise in the future. In such an environment it is easy to adopt badly drafted arbitration clauses and this can lead to serious practical difficulties when disputes indeed arise and the relationship between the parties are no longer cordial.

Arbitration agreements are of two types: one is the agreement to submit “future disputes” to arbitration. This is usually done by an arbitration clause in the principal contract The other type is to refer existing disputes to arbitration. This is called a submission agreement This article will mainly deal with arbitration clauses. An arbitration clause should be in writing to meet the requirements of the Sri Lankan Arbitration Act No 11 of 1995, Section 3(2) of this act recognises arbitration clauses as deemed to be in writing if contained in a document signed by the parties or in an exchange of letters, telexes, telegrams or other means of telecommunication which provides a record of the agreement. The UNCITRAL Model Law, Art 7 (2) and the New York Con. Art 11.2 also require an arbitration clause to be in writing or evidenced by a text contained in telexes, telegrams, letters etc. Most countries insist on a written arbitration clause. Some such countries are the Netherlands, Switzerland, Spain and Korea. Then there are countries which do not insist on a particular form to be followed in the drafting of an arbitration clause or a submission agreement, and even a very simple arbitration clause such as ” English Law – arbitration, if any, London according to ICC rules” is adequate. This was held to be a valid arbitration agreement in the case of Arab African Energy Corp Ltd V Olieprodukten Nederland B V (1983) 2 Lloyds Reps 419.

One question which arises is if an arbitration clause should be in writing should it also contain the signatures of the parties? What is the position where the arbitration clause is found in a telex or a computer- generated letter without a signature? Although there have been conflicting decisions by courts of various countries, the view that is popular is that the arbitration clause or the agreement where such a clause if found need not contain signatures where the form of correspondence used does not permit personal signatures. This view has been expressed by courts in Switzerland and Italy and appears to be the generally accepted view now.

Arbitrations mostly arise out of a contractual relationship between parties. The New York Convention and the UNCITRAL Model Law require a defined legal relationship whether contractual or not. Even a dispute submitted to arbitration governed by principles of delectual liability will come

within the scope of that article. Limits may be imposed by public policy considerations which will decide whether a dispute is arbitrable or not. These considerations vary from state to state and in the case of international arbitrations arbitrability involves a balancing of competing policy considerations. If the dispute is in relation to a matter that is not arbitrable then the arbitration clause will be invalid and even if an arbitration takes place courts will refuse to enforce such an award. In Sri Lanka, matters of a public law nature such as criminal law, matrimonial, inheritance and adoption of children are a few among many areas which may not be arbitrable and therefore remain within the domain of courts.

The most important matters to be considered at the time of drafting an arbitration clause include:

(a) Appointment of the arbitral tribunal

(b) Place where the arbitration is to be held.

(c) Procedural rules that will be applied in the arbitration

(d) Law governing the contract.

(e) Language of the arbitration.

(f) Exclusion of the right to recourse.

(g) Consolidation.

(a) Appointment of the arbitral tribunal

The decision about how many arbitrators to appoint rests with the parties except where the parties select an institution to administer the arbitration. When an institution does the appointments then the number will depend on the rules of the institution. It is always cheaper to have a sole arbitrator and that may cut down on delays as well. Some countries such as the USA stipulate that if the parties have not otherwise decided on the number of arbitrators there should be a sole arbitrator (US Federal Law) In Scotland even in international arbitrations the number of arbitrators is one if the parties have not agreed on the number. In New Zealand, the Law Commission recommended that in domestic arbitrations there should be a sole arbitrator if the parties do not agree otherwise. However, New Zealand has opted to have three arbitrators in international arbitrations if the parties fail to determine the number, which follows the UNCITRAL Model Law provisions.

In many countries the number of arbitrators should be uneven (Belgium, Brazil, Germany, Italy, the Netherlands, Spain etc) In some of these countries having an even number of arbitrators will amount to the invalidity of the arbitration clause. In most countries where there is a panel of 3 arbitrators the parties usually nominate an arbitrator each and then a neutral third arbitrator is appointed by the agreement of the parties or the two arbitrators already nominated by the parties or by an appointing authority. As the possibility of the parties or the second arbitrator already appointed being unable to reach consensus is always present it is safer to have a fallback provision: to have an appointing authority to step in to appoint the third arbitrator if the parties or the two arbitrators disagree.

In administered arbitrations the number of arbitrators vary according to the rules of the institution. The ICC rules (article 2.2) provide for a sole arbitrator or 3 arbitrators. The LCIA rules provide for a sole arbitrator or a number more than one (article 3.1)

In international contracts it is common to find provision for more than one arbitrator. Often it is desirable to have panels of 3 arbitrators in such contracts so that each party is able to nominate an arbitrator. However even in international contracts if the amount involved is small then it will be more cost effective to have a sole arbitrator than having a panel of 3 arbitrators which results in

considerable cost But at the time of drafting the arbitration clause legal practitioners cannot envisage the size of the dispute that may arise in the future and therefore it is not easy to decide whether there should be a sole arbitrator or a panel of 3 arbitrators. In view of this the best would be to have a panel of 3 in international contracts but also to reserve the option of having a sole arbitrator if the dispute turns out to be a relatively minor one.

It is equally important the manner of the selection of the arbitrators. In international arbitrations it is important for at least one of the arbitrators to be familiar with the law of the place of arbitration. If all the arbitrators are unfamiliar with the law of the situs there is the risk of them making an award which may not be recognised by the courts of the country where the arbitration took place and therefore may become unenforceable even in other jurisdictions. Therefore it is recommended that at least one of the arbitrators should be knowledgeable in the law of the situs and the chairman of the panel of 3 should preferably have experience in the practice of arbitration, writing awards, etc to facilitate the enforcement of the award.

Parties are expected to nominate independent and impartial arbitrators. If a party nominates an arbitrator who is deemed not to be impartial or independent, the other party has the right to challenge the nomination. Most institutions have a provision which requires the arbitrators to disclose the existence of any circumstances which may cast a doubt on his impartiality or independence. Article 3.1 of the LCIA rules and ICC rules, art. 2.7 require such disclosure by the arbitrators.

It is important not only to agree on the initial appointment of the arbitrators but also to provide for the appointment of a substitute arbitrator should a vacancy arise. Often it is provided for vacancies to be filled in the same manner as the original appointment was made. Usually provision will be made for any such appointment but where an arbitrator resigns without the consent of the arbitral tribunal at the instigation of the party that appointed him in a move to delay the arbitration there is rarely any provision found to cater to such a situation. Even most institutes do not provide for such an eventuality but ICSID arbitration rules (11 (2) (a) have made provision whereby in the event of such a resignation the replacement will be made by the appointing authority and not the party who appointed him earlier.

As pointed out, it is very important not only to have clear provisions in an arbitration clause concerning the appointment of arbitrators but to cater to vacancies that may arise due to death, incapacity, resignation etc. It is desirable, if possible, to provide for situations where the arbitrator resigns without the consent of the tribunal As regarding the independence and impartiality of the arbitrators it is not usual to make provisions in an arbitration clause and anyway is not required in the case of administered arbitrations as most institutions treat this as a condition precedent to the appointment of arbitrators.

Sri Lankan position

The new Arbitration Act (sec 6 (1) has left it to the parties to determine the number of arbitrators. However where the parties are unable to agree on the number the act stipulates (6(2)) that the number of arbitrator shall be 3. Where parties to an arbitration appoint an even number of arbitrators (eg 2,4) then the arbitrators so appointed shall appoint an additional arbitrator who shall be the chairman of the tribunal (sec 6 (3)). It must be noted that there is a significant change introduced by this act, which is that the appointment of an umpire to a panel of two arbitrators has been done away with. Although in the past it was common to find in Sri Lanka, and is still common in England (especially in commodity arbitrations) arbitral panels of two arbitrators with an umpire the UNCITRAL model law does not recognise this concept for the reason that it was considered that having an umpire can sometimes lead to a certain amount of confusion particularly when an umpire is appointed only when there is disagreement between the two sitting arbitrators. In view of that the new Sri Lanka law requires that there should be an uneven number of arbitrators. The idea is to prevent a situation of a

stalemate due to the two arbitrators disagreeing. By having three or an uneven number it is hoped that there would be a majority decision always. Of course this may not be the case every time.

The Sri Lankan Arbitration Act requires the appointment of arbitrators who are independent and impartial and if they are not the parties have the right to challenge them. In view of this in arbitration clauses subject to the said act it is not necessary to specially provide for provisions relating to their independence and impartiality.

The Sri Lankan Arbitration Act (sec 10 (1) requires arbitrators to disclose any circumstances likely to give rise to doubts as to his impartiality or independence from the time of his appointment to the conclusion of the arbitral proceedings. Not only the opposing party but the party who made the appointment can challenge the arbitrators he appointed if he later becomes aware of circumstances which give rise to justifiable doubts as to the arbitrators impartiality or independence (sec 10 (2)). Such a challenge has to be done before the tribunal within 30 days of his becoming aware of the facts and may appeal to the High Court from the order of the tribunal.

(b) Place where the arbitration is to be held (situs)

The place of the arbitration is of upmost importance. The choice should not be based on geographical convenience alone but should be selected after careful consideration of the following, among other matters

(1) the law governing arbitration in the place selected by the parties,

(2) supportive role of the courts of the place of arbitration,

(3) enforcibility of the awards,

(4) neutral site.

Law governing the arbitration.

When considering the law of the situs one important matter that is considered is whether the country where the arbitration is held is a party to the New York Convention. If the country is a contracting country to this convention then an award valid under the laws of the country can be enforced in any of the other contracting countries. But the recognition and enforcement may be refused if the award

“…has been set aside or suspended by a competent authority of the country in which or under the law of which that award was made” (art. V 1 (e) of the New York convention).

Subject to this qualification an award will be enforceable in any of the countries. It is important for the winning party to be able to pursue the assets of the losing party to countries where such assets are located and this is only practicable if courts of countries where assets are, are willing to enforce an award made elsewhere. The New York Convention caters to such situations by making it obligatory on the part of the contracting countries to enforce valid arbitration awards made by each other.

When considering the challenge of an arbitral award one factor that has to also be considered is whether the country where the arbitration was held allows challenges for all parties irrespective of their nationality. There are a few countries, such as Belgium, where de-localised arbitrations are possible and Belgium does not allow the award being challenged in its local courts even if the arbitration was held in Belgium if the parties are not nationals of Belgium . In spite of this situation such an award may be challenged at the time of enforcement in another country. Therefore when selecting the place one has to be aware of the rights of the parties in relation to challenging the award in the local courts.

When it comes to enforcement rules applying to enforcement can make it easy or difficult depending where one is. In England enforcement is simple and is done by first obtaining leave from court and once that is granted, judgement is entered in terms of the award.

Sri Lankan position

Sri Lanka is a party to the New York Convention. Although Sri Lanka became a contracting country many years ago it only enacted the enabling statute in 1995. Provision has been made in Arbitration Act no. 11 of 1995 to give effect to the treaty obligations of Sri Lanka under the New York Convention. Since the said enactment arbitral awards valid under the Sri Lankan law can be enforced in any of the contracting countries and can be challenged at the time of application for recognition and enforcement only under limited grounds, and that too not on merit.

The Sri Lankan law has gone one step further and not limited the recognition of awards to arbitral awards made only in contracting countries but has opened its doors to all foreign arbitral awards irrespective of the country in which it was made (sec 33).

The Supportive role of the courts

The place where the arbitration is held is also influenced by the role of the courts in the said place. Parties should consider whether the courts will play a supportive role and help the arbitration to proceed by making necessary conservatory orders and making rulings when matters such as jurisdiction of the tribunal are challenged. If the local courts are capable of interfering in the arbitration and the parties can easily obtain restraining orders to stall the arbitration in delaying tactics then such a situs will be unattractive to a party who wants the arbitration to proceed as quickly as possible. However, this depends on from whose point of view one looks at this question, whether it is the claimant’s or the respondent’s. If it is the respondent’s, it may be to his advantage to be able to go to court at every turn if his motive is to delay or stultify the arbitration. But at least what a respondent will want is a reasonable opportunity to present his case fully before the tribunal. As at the time of drafting the arbitration clause one does not know whether he will be the claimant or the respondent it is advisable to select a situs where courts play a supportive role but do not interfere too much in the hearings.

As regarding conservatory orders some arbitral institutions make provision in their rules. LCIA so provides but ICC does not.

Also it is important to seek assistance of the courts of the place of arbitration when it is necessary to get third parties to do certain things eg, summoning third parties to give evidence, produce documents, freeze money belonging to a party to the arbitration, etc. In these situations the arbitral tribunal may not have the power and if so will have to seek the assistance of courts to make binding orders. The taking of security, discovery and production of documents and obtaining restraining orders are some other areas where court assistance is sought. In England courts playing a supportive role issue Mareva injunctions to prevent the assets being removed by respondents. The English courts are regarded as non-interventionist.

Sri Lankan Position

The Arbitration Act no. 11 of 1995 (sec 13) provides for interim measures which include the taking of security. Sec 20 provides for summons to be issued by the High Court on witnesses at the request of the tribunal and where a person so summoned fails to appear before the tribunal provision is made by sec 21 giving power to the High Court to require such a witness to come before court for examination.

When parties decide on the place of arbitration it is important to mention that in the arbitration clause without any ambiguity to avoid problems later. In the case of Bauhinia V China National Machinery and Equipment Import and Export Corporation, the parties specified in a separate clause

(not the arbitration clause) that if an arbitration was necessary and was to be held in Peking it was to be subject to the rules of procedure of the Foreign Trade Arbitration Commission in Peking. An American court, after considering this clause, decided that the arbitration should be held in California under the American Arbitration Association’s rules. This is a clear situation where ambiguity had resulted in the arbitration being held in a place where the parties never intended it to be held at the time of drafting the clause.

Some other factors considered in the selection of the situs are: Nationality of the parties

Parties when of different nationality will obviously like to select as the situs their home country for the reason that they are familiar with the laws, the functioning of the courts etc. There would be competing interests when nationalities differ. However, in such situations it is common for the parties to opt for a neutral venue so that everyone feels comfortable. Some arbitral institutions will select the venue unless the parties have agreed to hold the arbitration in a particular country.


It is well-known that the cost of the arbitrations can vary considerably depending on where they are held. A party in difficult financial circumstances will prefer a place where it would be cheaper to hold the arbitration whilst a large corporation with almost unlimited funds may disregard this criteria and place emphasis on other matters.


The distance the arbitrators, the parties and the witnesses have to travel also will be considered in the selection of the situs. Parties would be reluctant to select a country to which travelling takes a long time and is also difficult. This matter can be also considered where considering the possible expenses.

Political acceptability

There were times particularly during the Cold War era when countries were reluctant to have arbitrations in countries which had political regimes quite different to their own. Although now these considerations seem to be less important still one wonders when Western countries are confronted with the possibility of having arbitrations (if at all) in countries such as Iran, Iraq and Libya whether they would show much enthusiasm.

It must be noted that a determination of the place of arbitration does not tie down the tribunal to having the full hearing in that place. Where it is necessary for the tribunal to hold meetings in other places it can usually be carried out and such freedom is quite useful in construction contract arbitrations as the tribunal can if necessary visit the site of the construction and examine witnesses. However, the award should be made at the place of arbitration. If not it may lead to difficulties at the time of enforcement. In one arbitration which was mostly held in England the award happened to be signed in Paris and court (Hiscox V Outhwaite, (1991) 2 WLR 1321) held that the award was made in Paris. In view of this it is important to make the award at the situs as this will go to determine the place of arbitration which in turn will be relevant under the New York Convention.

One other matter that may influence the selection of the situs is the restrictions placed on arbitrators and counsel at the place of arbitration. If there are such restrictions in a particular country that country may not become conducive to holding international arbitrations.

Singapore does not permit foreign lawyers to appear in arbitrations governed by Singapore law and this may be one reason why Singapore is slow to develop as a centre for international arbitrations in spite of having excellent facilities. There is such provision in Japan too and parties to international arbitrations may think twice before selecting such a country as the place of arbitration if they are foreigners and are unable to have the services of their own counsel.

In some countries there are restrictions regarding who can function as arbitrators

Selection of the situs in administered arbitrations

LCIA rules (art 7) specify that if the parties do not select the place of arbitration then the place shall be London unless the tribunal determines that another place is more appropriate. ICC rules (art 12) specify that the place of arbitration shall be fixed by the International Court of Arbitration unless agreed upon by the parties.

Most of the other institutions too have similar provisions. However, in ICSID arbitrations there are restrictions on the holding of the arbitration in a place other than Washington.

Finally, it must be said that normally an arbitration will be governed by the law of the country where it takes place and for that reason the relevant law should be acceptable to the parties to the arbitration. Although theoretically it is possible to apply a foreign law to govern the arbitration this is not wise as the local courts may decline to play a supportive role in such a situation and the arbitration might grind to a halt.

Sri Lankan position

Sri Lankan law allows the parties to make the selection of the place where the arbitration is to take place. If parties are unable to agree then the arbitral tribunal shall decide where the arbitration should be held (sec 16(1)). Once the place is so decided the tribunal with the agreement of the parties may meet at any other place for inspection of goods, property and hearing of expert witnesses etc.

(c) The procedural rules that will be applied in arbitration

In most countries the domestic law will provide assistance in procedural matters but it is unlikely to have mandatory procedural rules. In view of that in ad hoc arbitrations parties will have to decide whether they should formulate rules that will apply to the arbitration or adopt a body of rules such as UNCITRAL arbitration rules to govern the procedure. Trying to formulate rules is by no means an easy task and attempting to do a comprehensive set of rules will be not only time consuming but costly. The alternative is to adopt a set of rules that is ready made (eg UNCITRAL arbitration rules) However in the event of the parties deciding to have an administered arbitration and be subject to the rules of an institution then the procedure will be according to the rules of the institution. In such a situation the parties do not have to draft a comprehensive set of rules as the rules of the institution are made use of. But this does not mean that the rules of an institution will be all encompassing and will meet every eventuality. As examples the rules of ICC and LCIA can be referred to. The ICC rules do not regulate the right of parties to call witnesses, whether evidence should be written or oral, right to cross-examination, right to discovery and production of documents etc. Even the LCIA rules do not cater to every forseeable situation and the rules themselves (art 5.1) say “the parties may agree on the arbitral procedure and are encouraged to do so.” If the parties are keen on agreeing on a procedure acceptable to them then they should try to agree before the dispute arises as to what procedure they are going to adopt. But this does not mean that if they fail to do so they are barred from agreeing after that. In fact it is possible to agree on a procedure even after the dispute arises. If there is no agreement then normally the arbitrators will decide on the procedure. When there is no consensus regarding the procedure various problems can arise at the time of the arbitration. One such problem can be when in an international arbitration parties are from two different legal systems (eg

common law, civil law). In common law countries an adversarial system is found and more emphasis is placed on oral evidence of witnesses whilst in civil law countries more reliance is placed on documents and when it comes to calling witnesses the arbitrator will normally decide whether to call witnesses or not. In that kind of situation there can be a conflict between the expectations of the parties, and unless they agree before the dispute as to how evidence should be taken it can lead to difficult problems. To avoid such problems parties coming from different legal backgrounds can adopt rules such as International Bar Association’s Rules of Evidence which is a blend of the adversarial and the inquisitorial system.

Sri Lankan position

The Sri Lankan law provides (part V) for certain procedural matters and subject to those the parties are free to determine the procedure (sec 17). Sec 15 (2) makes it mandatory for the arbitrator to hear both parties and the evidence can be presented orally or in writing. Sec 15 (3) deals with the situation where a party fails to appear after the commencement of the proceedings. Sec 15 (4) provides for the amendment of prayers found in the statement of claim or defence after the commencement of the arbitration. Also this part of the act provides for obtaining summons from the High Court (sec 20) and also has made provision relating to witnesses who refuse to appear before the arbitral tribunal on summons (sec. 21). There is also provision relating to taking evidence by affidavit, administering an oath (sec 22), right of representation (sec 23) etc. It is also important to note that an arbitral tribunal is not bound by the provisions of the Evidence Ordinance (sec 22).

(d) The law governing the contract

It is of fundamental importance to choose the law that will govern the contract. Quite often in contracts there is a separate clause that provides for this. In the absence of a separate clause it is important to include a provision relating to the law governing the contract in the arbitration clause. Normally the parties will like to subject the contract to their own laws, and if the parties are from two different legal systems then it may become difficult for them to agree to either of their laws. In such a situation a neutral law of another country will be a good choice or the parties if they so wish can subject the contract to International Trade Law (Lex Mercatoria). But courts in some countries may be reluctant to pronounce what Lex Mercatoria is and if that happens it may lead to difficulties. It is also possible for the parties to authorize the arbitrators to decide on the basis of ex aequo et bono or as amiable compositor.

Parties to an arbitration can normally select a law which is not the law of the place the arbitration takes place to govern the contract. Such a selection will usually be upheld by the local courts subject to bonafides and public policy reasons. It is not mandatory to select one single law and it is possible to have a combination. Such a mixture is sometimes found in international contracts. In this manner it is possible to combine public international law with the national laws of a country and it is also possible to have general principles of law with a national law. However when one is opting for a combination it should be done with full awareness as to what it entails as otherwise it may lead to a confusing situation.

Model laws and most institutional rules provide for the parties to select the law applicable to the contract. UNCITRAL arbitration rules provide “the arbitral tribunal shall apply the law designated by the parties as applicable to the substance of the dispute” (art 33. 1) ICC rules provide “the parties should be free to determine the law to be applied by the arbitrator to the merits of the dispute” (art 13.3)

A choice of law clause may not be complicated and can be drawn in simple terms. It would be sufficient to say “This agreement shall in all respects be governed by the law of Sri Lanka.”

Sri Lankan Position

The Sri Lankan Arbitration Act provides for the dispute to be decided in accordance with the law selected by the parties (sec 24(1)). If the parties have not selected the governing law the arbitral tribunal shall apply Conflict of Laws rules (sec 24 (2)). The Sri Lankan law also provides for arbitrators to act as amiable compositors and ex deque et bono if the parties so desire. If the parties wish that the dispute should be decided according to trade usages this is possible in terms of Section 24(4)

(e) Language of the Arbitration

Parties can decide what language they are going to use in arbitral proceedings. But if the parties do not decide at the time of drafting the clause what language they are going to use in the arbitration then normally it is left to the arbitrators to make the decision once the proceedings commence. In the case of an arbitration administered by an institution, the institution will decide the language. In deciding what language is to be used much weight will be given to the language of the parties, their nationality, language used by counsel, witnesses, etc. Although at the time of drafting the arbitration clause it may appear that the selection of a language for the arbitration is not significant, unnecessary problems can arise later when the dispute arises and the parties speak two different languages and are unable to agree which one to use to conduct the proceedings. Therefore, to avoid such a potential problem, it is important to select the language at the time of drafting the clause particularly in situations where parties to a contract speak two different languages.

Sri Lankan position

The arbitration act does not contain specific provisions relating to the selection of the language but considering that parties are free to agree on the procedure to be followed by the tribunal it can be assumed that matters relating to the conduct of the proceedings, such as the language to be used are left for the parties to decide.

(f) Exclusion of the right to recourse

Most countries will permit some kind of recourse against the award to the national courts. In some countries parties are permitted by agreement to exclude the right to recourse. In some other countries recourse against an award may be available only if the parties agree to make provision relating to recourse. In England and Sri Lanka the limiting of the right to recourse is by exclusion agreements. Exclusion agreements were recognised in England by the Arbitration Act of 1979 and since then courts have upheld the rights of the parties to enter into such exclusion agreements. Most arbitral institutions contain provisions dealing with the exclusion of the right to recourse, Article 24 (2) of the ICC rules provides for such exclusion. This clause was held to be a valid exclusion agreement recognised by the 1979 Arbitration Act of England in the case of Arab African Energy Corporation Ltd V Olieprodukton Nederland BV (1983) 2 Lloyd’s refs 419

In England the Court of Appeal in a subsequent case also decided in favour of the validity of exclusion clauses (Marine Contractors INC V Shell Petroleum Development Co of Nigeria, Ltd, (1984) 2 Lloyd’s Rep, 77. Another leading case that interpreted exclusion clauses in England was Pioneer Shipping Ltd V BTP Tioxide Ltd “The Nema” (1982 AC 724).

Similar provisions are contained in LCIA rules. Article 16.8 provides

“by agreeing to arbitration under these Rules, the parties undertake to carry out the award without delay, and waive their right to any form of appeal or recourse to a court of law or other judicial authority, insofar as such waiver may be validly made. The Awards shall be final and binding on the parties as from the date they are made”

This rule excludes the right of recourse. It must be noted however that some countries may not recognise such exclusion agreements and therefore once an award is made the losing party may be able to go to the local courts in spite of the exclusion clause and seek the setting aside of the award. But this position seems to be changing in most countries with the exclusion clauses gradually becoming acceptable to courts. The present thinking seems to be that it is more important to ensure the finality of an arbitral award rather than its legal accuracy.

Sri Lankan position

The Arbitration Act provides for the parties to enter into exclusion agreements that exclude the right of appeal (sec 37 (4). Where there is such an exclusion agreement the parties will not be given leave to appeal to the Supreme Court from the High Court even on a question of law.

But no provision has been made to apply exclusion agreements to the stage where the right of recourse is available from the tribunal to the High Court at the time of an application to set aside the award (sec 32) or at the time of applying for recognition and enforcement (sec 34). In view of this all awards made in Sri Lanka are initially subject to challenge in the High Court and they can be set aside if there are procedural irregularities but not for reasons of merit (sec 32 and 34). In these circumstances even exclusion agreements in the nature of the clauses found in the ICC and LCIA rules may be construed by Sri Lankan courts as of limited application, to apply only at the second stage of appeal

(g) Consolidation

Consolidation arises when there is more than one dispute or more than two parties to an arbitration. In construction contracts where subcontractors are employed there can be in addition to the main dispute between the employer and the contractor other disputes involving the subcontractors. Where there are several disputes and parties it is practical to consolidate all existing disputes into one arbitration as this would be not only cost-effective but time-saving. It will also prevent inconsistent findings by different panels. The arbitrators do not have inherent power and the parties have to confer powers of consolidation on the arbitrators. In some countries the local courts have the power to consolidate arbitrations. The State Courts of New York have asserted the power to consolidate arbitral proceedings, where common questions of law or fact are involved. However, this trend does not prevail in most countries and consolidation is usually by consent of parties. Parties involved in a construction contract with several “string” contracts can execute an arbitration clause agreeing to join all the parties to the related contracts to which the dispute relates.

Arbitral institutions have attempted to simplify the problem of having to deal with multi-party arbitrations. LCIA rules (art. 13(1) (c)) provide for multi-party arbitrations. The ICC in an attempt to deal with this situation has proposed that the International Court of Arbitration of the ICC should appoint all the arbitrators without parties to a multi-party arbitration making the nominations. In this manner the ICC is trying to avoid the potential problems of international recognition and enforcement of awards

Sri Lankan position

The Arbitration Act is silent regarding the consolidation of arbitrations. Therefore it is left to the will of the parties to agree to a consolidation where there are more disputes and more parties than they originally contemplated. It nothing but makes sense to consolidate arbitrations in such situations to cut costs and time.

Defective Arbitration Clauses

It is important to pay close attention to the wording of an arbitration clause. Commonly found wording has at times been given different interpretations by courts of different countries. Therefore when drafting an arbitration clause in international contracts it is important to be aware of various interpretations given by courts to commonly used wording.

“Any dispute or difference arising under” used in an agreement was held to be narrow and would not cover a claim of fraudulent inducement of the contract, by US courts. But later US courts held that “any question or dispute arising or occurring under” was broad and would include a claim of fraudulent inducement. Also the words “all claims and disputes of whatever nature arising under this contract” were held to cover all contractual, tortuous and statutory claims.

In England the words “claims”, “differences” and “disputes” have been held to give widest cover of issues whilst in the US “controversies” or “claims” have been held to give the widest possible meaning. UNCITRAL arbitration rules have adopted a mixture of both these and recommends the

following clause.

“any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL arbitration rules as at present in force”

In England courts have held that the phrase “arising out of ” has the widest meaning and will include all disputes that are capable of being submitted to arbitration. It was so held in the case of Ethiopian Oilseeds and Pulses Export Corporation V Rio Del Mar Foods Inc (1990) IQB 86

It has also been held that the use of the phrase “under this contract” will only include purely contractual claims and exclude any other claim (Ashville Investments Ltd V Elmer Contractors Ltd (1989) QB 488 at 508)

Arbitration clauses can suffer from inconsistency and when that is the case courts will usually attempt to give a meaning to it to give effect to the intention of the parties.

Some arbitration clauses may give rise to uncertainty. Here too the courts will try to give effect to the intention of the parties to arbitrate unless the clause is so badly defective that it is difficult to give any meaning to it. There have been several instances when arbitration clauses which purport to provide for ICC arbitrations have been found teeming with uncertainty. One clause read

“In the event of any unresolved dispute the matter will be referred to the International Chamber of Commerce”.

This clause is uncertain for the reason that it does not say whether the dispute is to be settled by arbitration or conciliation or by a different method.

Another clause had the wording

“In case of dispute the parties undertake to submit to arbitration but in case of litigation the Tribunal de la Seine shall have exclusive jurisdiction”

This clause appears to be meaningless and falls into the category of the “pathological arbitration clause” writers speak of.

The New York Convention (art. 11.3) speaks of arbitral agreements that may be null and void, inoperative or incapable of being performed. An arbitration clause may be inflicted with inoperability. A clause may be inoperative in a situation such as where there is a time limit and the parties have not adhered to it or where the parties have impliedly revoked their arbitration by conduct.

“Incapable of being performed” appears to include a situation where it is impossible to establish an arbitral tribunal . An arbitration clause which is “incapable of being performed” may encompass a situation where the laws of a country prevent the holding of an arbitration which would require the remitting of money from the country for the payment of arbitrators and other expenses.


As stated at the beginning of this article, the importance of drafting a proper arbitration clause cannot be overemphasised. The whole dispute resolution mechanism can become meaningless if the arbitration clause does not correctly convey the intention of the parties and fails to cater to situations that arise when a dispute crops up between the parties. To avoid such difficulties more attention should be paid to the arbitration clause at the time of drafting and provisions relating to matters that are indispensable for the conduct of a successful arbitration should be included in the clause. Precision, clarity and simplicity of language should be the guiding principles adopted in the drafting. When sufficient attention is paid at the time of drafting parties will have the confidence to meet the challenges posed if disputes arise in the future.

Impartiality and Independence of Arbitrators

It is a general principle in arbitration that an arbitrator must act and must be seen to act fairly between the parties, and the arbitrator must be and remain impartial and independent.

This principle is subscribed to by the Arbitration Act, No 11 of 1995. Section 15 (1) of the said Act requires arbitral tribunals to act in an impartial manner. This requirement is further emphasised by section 15 (2) whereby the arbitral tribunal is required to give all the parties an opportunity of presenting their respective cases. The objective of this provision is to ensure that all parties to an arbitration are treated in a fair and an equal manner.

All major international arbitral institutions require arbitrators appointed under the rules of their institutions to be impartial and independent. The International Chamber of Commerce (rule 2.7 deals with disclosure), London Court of International Arbitration (rule 3.1 requires arbitrators to make a declaration) and International Centre for Settlement of Investment Disputes (rule 6 relates to the declaration by arbitrators) are among the well-known institutes that specifically require arbitrators to be independent and impartial. UNCITRAL arbitration rules require independence and impartiality from arbitrators and article 9 require arbitrators to disclose any facts which may make him/her unsuitable for appointment)

As this general principle found in arbitrations is now part of Sri Lankan law this article does not deal with the limited number of non-conventional arbitrations held under the rules of some commodity trading associations where non-neutral arbitrator/advocates are permitted to be appointed to the tribunal.

In relation to independence of arbitrators what matters is whether the arbitrator has any kind of relationship to the appointing party. This can be financial or some other kind of relationship. If the arbitrator has a direct professional relationship with a party or a financial interest in the company which is a party to the arbitration, such as shareholdings, then he does not have the required independence to act as an arbitrator. There can also be other grounds in addition to the ones referred to which can affect the independence of an arbitrator. The appearance of independence is of as vital importance as in fact being independent and therefore it is necessary that a person nominated as an arbitrator should decline to accept if they have any doubts of being able to function independently due to any relationship they have with the appointor.

Arbitrators are also required to be impartial and they must not be biased in favour of the appointor or in respect of the subject matter of the dispute. The concept of impartiality is different from independence although the difference is often not very obvious.

In arbitrations where a party is given the option of appointing an arbitrator of his choice, it is common for a party to nominate an arbitrator who is generally pre-disposed favourably towards him. This by itself need not disqualify an arbitrator on the ground of partiality, as an arbitrator so appointed can still be capable of reaching a decision impartially and judicially. Although the ideal would be for a party to appoint a neutral arbitrator, in the real world often parties nominate arbitrators who are favourably pre-disposed towards them. Such an arbitrator must be cautious not to allow whatever affinity he has with the party to cloud his mind and to be biased in the appointor’s favour in the course of the arbitration.

It is the obligation of the person nominated to decline the appointment if there are any reasons, which may give, rise to an allegation of bias. He must use common sense in deciding whether to accept the offer. The test is whether a reasonable person would perceive bias due to any kind of relationship the nominated person has with the appointor. Even a neutral person must act in the same manner if he thinks that for any reason there is impediment towards exercising his professional judgement independently and impartially.

It has been observed in some arbitrations that the party-appointed arbitrator has openly shown his sympathy with the appointor and has even attempted to impose his appointing party’s views on the other arbitrators. The author has seen an arbitrator behaving as if he was the spokesman and the advocate of the appointor and even attempting to harass the opposing party and their witnesses. It is also known that some partial arbitrators can even go the the extent of making untrue and misleading statements to the other arbitrators beneficial to their appointor’s case.

This type of conduct is reprehensible and should be condemned by all who are interested in the development of arbitration in Sri Lanka as a fair and a more practical method of dispute resolution. It is disturbing to note that as a result of such conduct by a handful of arbitrators, the parties who have been unfairly treated have lost confidence in the arbitral process.

Many years ago it was said in England that “The arbitrators selected, one by each side, ought not to consider themselves the agents or advocates of the party who appoints them. When once nominated they ought to perform the duty of deciding impartially between the parties, and they will be looked upon as acting corruptly if they act as agents or take instructions from either side.” (Russell on Arbitration, 20th Edition, 1982). This statement has been quoted with approval several times since it was made.

It is improper for an arbitrator to hold private discussions with the appointor in respect of matters referred to arbitration. The only situation where the arbitrator may communicate with the appointor regarding the ongoing arbitration is after he informs the opposing party of his intention to do so. It is not considered improper for an arbitrator to assist the other arbitrators to understand his appointor’s case if he is truly convinced of the merits of the appointor’s case after listening to the evidence carefully in a professional and unbiased manner.

It is also important for an arbitrator not to have any social contacts with a party or a witness of an ongoing arbitration. It would also be prudent that during the pendency of an arbitration any social contacts the arbitrator would normally have with the counsel of the appointor be curtailed and when such contacts are unavoidable no reference be made to the arbitration.

In England Donaldson J is recorded to have stated regarding arbitrators that,” neither arbitrator has any special relationship with the party which appointed him and each arbitrator is under the same duty of fairness, openness and impartiality to both parties.” [ 1970] 1 QB 527.

When an arbitrator shows obvious bias the party affected by the partial conduct can consider making a formal challenge to the arbitrator initially at the tribunal itself and, failing that, in Court. Section 10 (3) of the Arbitration Act enables a party to challenge an arbitrator on the grounds of partiality and for not being independent, within 30 days of becoming aware of such grounds. This has to be first made to the tribunal, and if unsuccessful an appeal to the High Court within another 30 days is allowed (section 10 (4) An arbitrator can be challenged even by the party who appointed him if that party subsequently becomes aware of facts which give rise to justifiable doubts as to his impartiality and independence (section 10 (2)). A requirement that goes hand in hand with impartiality and independence is disclosure. A person approached by a party to be appointed as an arbitrator must disclose all facts, which can be construed as grounds of challenge of his appointment. This is a continuing duty, which continues until the arbitration is over. Section 10 (1) of the Arbitration Act has made disclosure mandatory. The question often arises as to whether it is ethical for an arbitrator to consult third parties (not parties to the arbitration or their witnesses) regarding the issues of the arbitration. It must be said that this conduct is always fraught with danger as it can be used as a ground of challenge of the award. But it would not be improper for an arbitrator to discuss the case with a friend or a colleague. However, if the arbitrator consults experts or other witnesses without the approval of the parties, that may lead to the award being successfully challenged. Similarly, an arbitrator must not use his own knowledge of the facts relating to the arbitration without informing the parties. An exception to this would be where the arbitrator has in fact been chosen for his expertise in the area with which the dispute is concerned. In England an arbitrator who acts fraudulently may be liable in damages to the party against whom he colluded. Justice Mustill and Mr Boyd have taken the view that,”… where the award is procured by inducement or improper pressures, the injured party must have an action against the arbitrator and the colluding party jointly.” The learned authors have further sated that, “If the respondent has honoured a money award, and finds that (after discovery of the impropriety) he cannot recover from his opponent, he may claim damages which include the amount of his payment. This may raise problems, since he will be required to prove that had there been no collusion the award would have been in his favour.” This principle will also apply to Sri Lanka as the Arbitration Act has specifically made arbitrators “liable for fraud in respect of anything done or omitted to be done in that capacity.” (Section 45 Arbitration Act) This is an important exception made to the immunity of arbitrators where they act in a bonified manner. The moment an arbitrator colludes with a party dishonestly he becomes liable in damages. A party to an arbitration who is affected by the action of a corrupt arbitrator can exercise his right to sue the arbitrator for damages. Finally, it must be said that there is a very pressing need to train arbitrators in Sri Lanka.. It is not easy to become a good arbitrator. Some people think that retired judicial officers and lawyers are ideal arbitrators and they can fit in perfectly as arbitrators. But this is a misconception as the role of an arbitrator is different in several ways to the roles of judges and lawyers. Therefore, it is not easy for them to adapt to function in a different role without any training. It will improve the competence of the arbitrators if they receive a proper training. When arbitrators are made aware of the parameters within which they can function, their independence and impartiality is likely to improve. The end result of having better arbitrators would be improved confidence in the arbitral process.


Law and Practice of International Commercial Arbitration by Redfern and Hunter.

Commercial Arbitration – Mustill and Boyd

Russel on Arbitration

Drafting an Arbitration Clause for International Commercial Contracts by Sam Aaron.