The “one sentence arbitration clause” does not always pay off

If you choose the arbitration option it is because you expect to benefit from the “pros” of the arbitration proceedings as opposed to the “cons” of litigation. This is at least the general way of thinking.

Still, the approach to negotiating and drafting arbitration clauses tends to be rather easy. Arbitration clauses, governing law and jurisdiction clauses alike are usually the last ones to be addressed by the parties. Sometimes this happens after the parties had engaged in long negotiations on substantive items of their contract and, if this is the case, the parties are usually keen to close the deal as quickly as possible. This can lead to the so-called “one sentence arbitration clause” which, frankly, is not the top choice if you really want to go for arbitration.

If you are negotiating an arbitration clause which provides for Italian law as governing law or if the arbitration award is likely to be enforced in Italy, then you may wish to have a look at the following hints.

Below are just a few examples of the available options you may wish to consider. Do not neglect the importance of good drafting when it comes to arbitration clauses, even if you are closing your negotiations in the middle of the night (and you are keen to go home).

Which disputes are referred to arbitration under your arbitration clause?

Under Italian law the majority of disputes can be settled by arbitration (and, ideally, you should be able to know in advance which ones can and which ones cannot).

The real issue however is rather what disputes you genuinely believe your arbitration clause can cover. Sometimes the answer is not exactly the same you would have expected. The outcome depends heavily on how (well or bad) the arbitration clause was drafted.

The usual language which we often come across in arbitration clauses sounds like “Any disputes arising out of this agreement shall be referred to arbitration …” You may think this is a good start. Well, it may be depending on whether you want to arbitrate contractual disputes only. If, on the contrary, you aim at including also tort disputes, then such wording is not correct.

Under Italian law parties may refer to arbitration either contractual and non-contractual disputes, or any of them, provided that this is clearly stated in the arbitration clause.

Therefore be specific if you want to be sure that your arbitration clause catches every kind of dispute you wanted to include. This means that tips like “use the broadest language possible” may not always fit for the purpose when the contract is governed by Italian law.

Governing law, rules of the arbitration proceedings

The arbitration clause should provide for the law applicable to the merits of the dispute as well as for the rules applicable to the arbitration proceedings.

Whilst the choice of the law governing the merits of the arbitration is rather common and usually matches with the law governing the whole contract, the choice of how the proceedings shall be conducted is generally made by reference to the arbitration rules of an arbitral body (eg International Chamber of Commerce (ICC), Singapore International Arbitration Centre (SIAC), London Court of International Arbitration (LCIA) etc).

This can be a good choice given the flexibility of the arbitration rules and the broad powers granted to arbitrators, although sometimes you may wish to establish different rules (eg in terms of witness evidence, number or hearings, etc) which shall be agreed upon and specified in the arbitration clause.

Arbitration panel or sole Arbitrator?

If you just made reference to the arbitration rules of an arbitral body but you did not specify whether the dispute shall be decided by a panel of arbitrators as opposed to a sole arbitrator, then the decision shall be taken by the arbitral body.

This means that the arbitral body will decide whether to appoint a panel of arbitrators or a sole arbitrator. If you have a complex and high value dispute, then the arbitration panel could be the right choice. Instead, if the dispute is plain vanilla and/or low value, there is little merit in appointing an arbitration panel. In fact, the appointment of an arbitration panel will trigger a material increase of the arbitration costs and a slowdown of the procedural path.

The real question is why should you leave to the arbitral body the choice with respect to the appointment of the arbitrator(s)? The outcome may not be always the best for you and your business.

Therefore make it clear in the arbitration clause that each party shall have the right to appoint its own arbitrator. For instance, if you know that in your country Professor X is a highly reputed expert of construction disputes or that Professor Y has a long and valuable track record of corporate disputes, you may wish to appoint him/her as your arbitrator.

You may also decide whether the Chairman of the Arbitration Panel shall be appointed by the arbitrators chosen by the parties or instead you may leave such decision to the arbitral body.

Sometimes it is good to have the Chairman appointed by the arbitrators. This should lead to the constitution of an arbitration panel where all arbitrators know each other and/or get along well with each other. No doubt this will benefit the conduct of the arbitration proceedings.

Another option you may wish to consider when drafting an arbitration clause is to provide that the Chairman should be of a third nationality, which is usually different from the nationality of the other arbitrators. This can be useful to balance the composition of the arbitration panel when the parties have different nationalities.

Can arbitrators grant interim reliefs, injunctions and seizures?

You may tend to believe that arbitrators which have jurisdiction over the merits of the dispute can also issue any sort of interim measure, injunction for payment and/or seizure.

Well, you may be surprised to hear that this is not exactly the case for an arbitration governed by Italian law. In this case, arbitrators cannot issue injunctions for payment, nor seizures, nor interim relief measures.

Italian Courts maintain a wide range of compulsory powers against the parties which cannot be delegated to arbitrators. The problem here is that if your arbitration clause does not contain a specific carve out for these (interim) remedies and you failed to structure an ad hoc jurisdiction clause, you may end up in troubles.

For instance if you issue ex parte interim proceedings before the Court to get an injunction for payment, the defendant can easily ask the Court to revoke the injunction, pleading that Courts do not have jurisdiction on the merits of the dispute - given the existence of the arbitration clause - and hence they were not entitled to issue the injunction for payment.

As a result, a good deal of care should be used when drafting your arbitration clause to avoid such unexpected outcome.

Are you sure you can appeal?

The vast majority of arbitration rules provide not only for the award to be final and binding, but also for the parties’ waiver of their right to appeal. This means that the parties cannot appeal against the arbitration award except in very limited cases (eg fraud/corruption of the arbitrators, etc) which are very difficult to prove.

Similarly, under Italian law the award cannot be appealed, nor challenged for breach of rules of law by the arbitrators, unless the parties have provided otherwise in the arbitration clause.

Therefore, if you want to be sure that you do not waive your right to appeal the award, make it clear in your arbitration clause.

What about punitive damages?

Punitive damages are not allowed under Italian law. So if the award provides for punitive damages it will not be enforceable in Italy. So either if you wish to avoid the risk of facing punitive damages or having your award rejected by Italian courts, do think to properly address the issue of damages in your arbitration clause.

Will you be able to enforce the award? If so how easily?

The majority of countries, including Italy, are parties to the New York Arbitration Convention so enforcement of arbitral awards is usually a straightforward process, although it depends from the legislation of the country where enforcement is sought. In Italy arbitration awards have the same legal value and effect of judgments and the enforceability process is relatively quick and easy.

Nonetheless if the State of your counterparty is not a signatory of the New York Arbitration Convention, you may face difficulties in enforcing the award (assuming you are the winning party). Also you may wish to gather information beforehand as to how long it will take you to complete the enforcement process and whether public policy matters may prevent the enforcement.

Therefore before deciding to add an arbitration clause to your contract, it is worth making some checks on the above to avoid ending up with a nice piece of award which you cannot enforce against your debtor.