The 5 Worst Arbitration Clauses And Why They Set You Up for Failure

1. Court or Arbitration? No One Knows.

A contract provides that disputes fall within the jurisdiction of the Dubai Courts. A later provision in the same contract then says that, if an amicable settlement is not reached within a specified period, the dispute must be referred to arbitration under the DIAC Rules.

Why it is a problem

The contract appears to select two different dispute-resolution forums.

Instead of establishing a clear route to arbitration, the drafting creates an immediate jurisdictional question: did the parties agree to litigate, arbitrate, or litigate unless some later condition is satisfied?

The result can be proceedings before both courts and tribunals while the parties argue about which forum has jurisdiction.

I have seen disputes become procedural ping-pong long before the underlying claim is addressed. That means delay, additional cost and unnecessary uncertainty.

How to fix it: Choose the intended forum clearly.

If disputes are to be resolved by arbitration, the arbitration agreement should say so unequivocally. Any reference to courts should be carefully limited to matters for which court assistance may still be required, such as interim relief, enforcement or other supervisory functions permitted by the applicable law.

2. The Arbitration Clause Living in the Past

Another recurring problem is a clause referring disputes to arbitration under legislation that has been repealed, replaced or is otherwise no longer appropriate.

This is particularly problematic where the old statutory framework provides for procedural mechanisms — such as two arbitrators followed by an umpire — that no longer reflect modern arbitral practice.

Why it is a problem

An arbitration agreement should create certainty about the procedural framework governing the dispute.

Referring to obsolete legislation can instead raise questions about what the parties actually intended, which provisions continue to operate, how the tribunal should be constituted and the extent to which a court must intervene.

A badly selected tribunal structure can compound the problem. Two-member tribunals are particularly undesirable because disagreement between the two arbitrators creates an obvious deadlock.

How to fix it

Check that the arbitration law, institutional rules and terminology referred to in the contract actually exist and remain in force.

For tribunal composition, use a sole arbitrator or a three-member tribunal.

Where three arbitrators are intended, each party may nominate one arbitrator, with the two party-appointed arbitrators or the relevant institution determining the presiding arbitrator in accordance with the applicable rules.

3. One Party Gets to Pick the Arbitrator

Consider a clause providing that disputes will be resolved by arbitration before a sole arbitrator selected exclusively by one of the contracting parties.

Why it is a problem

Arbitration depends upon independence, impartiality and procedural equality.

Giving one party unilateral control over the appointment of the decision-maker immediately raises questions about the fairness of the appointment mechanism and may generate challenges to the tribunal or, ultimately, the award.

It also defeats one of arbitration's central features: a neutral process agreed between the parties.

How to fix it

The appointment mechanism should treat both parties equally.

For a sole arbitrator, the parties can agree upon the arbitrator jointly or allow the designated arbitral institution to make the appointment if agreement cannot be reached.

For a three-member tribunal, each party may nominate one arbitrator and the presiding arbitrator can then be appointed in accordance with the applicable institutional rules.

A neutral institution such as DIAC, ICC or LCIA can also provide an appointment mechanism where required.

4. The Clause That Pretends Courts No Longer Exist

Some arbitration clauses attempt to give the tribunal exclusive authority not only to determine the dispute but also to exercise powers that ultimately depend upon state courts or enforcement authorities.

For example, a clause may purport to give an arbitral tribunal the exclusive power to order and implement precautionary attachment, sequestration or similar measures.

Why it is a problem

Choosing arbitration does not eliminate the role of national courts.

An arbitral tribunal may have substantial powers to grant interim or conservatory measures, depending upon the applicable arbitration law and institutional rules. But a tribunal does not possess the coercive machinery of the state.

Where assets must actually be frozen, property attached, orders enforced against third parties or compulsory measures executed, court or enforcement authority involvement may still be necessary.

An arbitration agreement therefore cannot simply declare that the courts have no role where the law itself reserves particular functions to them.

How to fix it

Preserve the parties' ability to seek appropriate interim and conservatory relief from competent courts without treating that application as inconsistent with the agreement to arbitrate.

The arbitration agreement should work with the supervisory and enforcement framework of the seat — not attempt to contract it out of existence.

5. The Arbitration Clause That Cancels Itself

This is one of my favourites.

Imagine a clause stating that the parties must attempt an amicable settlement for 20 days, but arbitration must also be commenced within 20 days from the same notice.

The drafting creates a procedural impossibility.

Why it is a problem

During the first 20 days, arbitration cannot properly be commenced because the contractual negotiation period has not yet expired.

But once those 20 days have elapsed, the separate 20-day period for commencing arbitration has also expired.

The clause therefore creates two conditions that cannot sensibly be satisfied together.

Commence arbitration early and the claim may be said to be premature.

Commence it after the negotiation period and the opposing party may argue that the contractual deadline has passed.

The parties have effectively drafted an arbitration mechanism that prevents itself from operating.

How to fix it

Separate the negotiation period from the right to commence arbitration.

For example:

If the dispute has not been resolved amicably within 30 days following written notice of the dispute, either party may commence arbitration in accordance with the agreed arbitration rules.

Simple drafting is usually better drafting.

Final Thoughts

The arbitration clause is often treated as boilerplate and negotiated at the end of a transaction, sometimes with considerably less attention than the commercial provisions preceding it.

That can be an expensive mistake.

The dispute-resolution clause determines what happens precisely when the commercial relationship has broken down and cooperation between the parties is at its lowest.

Ambiguity at that stage can turn one dispute into two: the substantive dispute itself and a preliminary dispute about how the first dispute is supposed to be resolved.

Before signing a contract, check the arbitration agreement carefully.

At minimum, it should clearly identify the parties' agreement to arbitrate, the scope of disputes covered, the seat, the applicable rules, the number and method of appointment of arbitrators, and any pre-arbitration requirements.

A well-drafted arbitration agreement should open the door to dispute resolution.

It should not become the first dispute the parties have to resolve.