In a recent post, we wrote about the Singapore High Court case of HKL Group Co Ltd v Rizq International Holdings Pte Ltd, [2013] SGHCR 5 which involved a good example of how a badly drafted arbitration clause increases uncertainty, time and costs for the parties involved. This was because the arbitration clause in issue was a so-called pathological arbitration clause i.e. a defective arbitration clause. In the worst case scenario, the clause might be so defective such that it cannot be enforced as an arbitration clause at all.

This post considers some of the common issues that may render an arbitration clause defective. It also sets out for the benefit of our readers various examples of pathological arbitration clauses which have failed and also some of those which have been upheld.

Background to the term

Frédéric Eisemann coined the term “pathological clauses” or “clauses pathologiques”, in “La clause d’arbitrage pathologique” in Commercial Arbitration Essays in Memoriam Eugenio Minoli (Torino: Unione Tipografico-editrice Torinese, 1974). According to Eisemann, there are four essential elements of an arbitration clause.

“(1) The first, which is common to all agreements, is to produce mandatory consequences for the parties,

(2) The second, is to exclude the intervention of state courts in the settlement of the disputes, at least before the issuance of the award,

(3) The third, is to give powers to the arbitrators to resolve the disputes likely to arise between the parties,

(4) The fourth, is to permit the putting in place of a procedure leading under the best conditions of efficiency and rapidity to the rendering of an award that is susceptible of judicial enforcement”.

An arbitration clause is pathological when it deviates from any one of the above four elements. How defective the clause is depends on the extent of the deviation from those elements.

Approach of the courts

The modern approach of the courts seems to be that they will strive to uphold the clause and prefer a viable interpretation over one that impugns the clause. This is subject to the caveat that parties have evinced an intention on their part to submit their disputes to arbitration.

In HKL v Rizq, the Singapore High Court held that a pathological arbitration clause “may or may not be upheld depend[ing] on the nature and extent of its pathology” (see paragraph [12]). However, the Singapore courts will generally seek to “give effect to that clause, preferring an interpretation which does so over one which does not” (see paragraph [13]). It was clear in that case that the parties had indeed evinced an intention to arbitrate, but had somehow referred to a non-existent entity in Singapore (“Arbitration Committee“).

In contrast, the Swiss Supreme Court in X Holding AG and ors v Y Investments NV (25 October 2010) (“X v Y“) rejected a pathological arbitration clause as not evincing the parties’ intention to arbitrate. The clause had called for disputes between the parties to be settled through AAA arbitration “or to any other US court“. A fuller account of the case and an English translation of the decision can be found here.

Common Issues and examples of Pathological Clauses

The following are some of the common issues that may render arbitration clauses defective. We have also set out examples of various pathological clauses which have failed and others which have been upheld.

Health warning: whilst some of these pathological clause make for humorous reading, we do not recommend any of them for adoption into your commercial agreements, not even those that have been upheld.

Does not appear to make arbitration mandatory

“[Parties undertake] to have the dispute submitted to binding arbitration through The American Arbitration Association [hereafter: AAA] or to any other US court. (…) The arbitration shall be conducted based upon the Rules and Regulations of the International Chamber of Commerce (ICC 500).” – (Failed – X v Y)

“In the event of any unresolved dispute, the matter will be referred to the International Chamber of Commerce” – (Failed – rejected by the ICC)

“In the case of dispute (contedstation), the parties undertake to submit to arbitration but in the case of litigation the Tribunal de la Seine shall have exclusive jurisdiction” – (Failed, see Craig, Park and Paulsson, International Chamber of Commerce Arbitration (3ed., Oceana, 2000), p. 128)

“The Unified Terms of the German Grain Trade as well as the arbitral tribunal of the purchaser shall apply.” (Upheld – the arbitration provisions of the Unified Terms deemed to be incorporated into the agreement, see Munich Higher Regional Court, Docket No. 34 SchH 12/11)

“English law – arbitration, if any, London according ICC Rules” (Upheld – Arab-African Energy Corp Ltd v Olieprodukten Nederland BV [1983] 2 Lloyd’s Rep 419 )

Institution not referred to, does not exist or erroneously referred to

“Any dispute or difference arising out of or relating to this contract or the breach thereof which cannot be settled amicably without undue delay by the interested parties shall be arbitrated in the third country under the rules of the third country and in accordance with the rules of procedure of the International Commercial Arbitration Association.” – (Upheld, Lucky-Goldstar v Ng Moo Kee Engineering [1993] 1 HKC 404)

The following vague and imprecise references have also previously been accepted by the ICC as references to the ICC International Court of Arbitration (see Law and Practice of International Commercial Arbitration (4ed) at [3-69]).

• “the official Chamber of Commerce in Paris, France“
• “the Arbitration Commission of the Chamber of Commerce and Industry of Paris“
• “a Commission of arbitration of French Chamber of Commerce, Paris“

See also the following references accepted by the German courts:

• “without resource [sic] to the ordinary court to Stockholm, Sweden” (Upheld as a Stockholm Chamber of Commerce Arbitration, see OLG Stuttgart [2006] OLG Report Stuttgart 685)
• “the International Court of Arbitration (Internationales Schiedsgericht) in Austria” (Upheld as reference to the international arbitration centre of the Austrian Federal Economic Chamber, see OLG Oldenburg [2006] Schieds VZ 223)

However, the Hamm Court of Appeal in Germany refused to uphold an arbitration clause which provided that “[the Parties] shall proceed to litigate before the Arbitration Court of the International Chamber of Commerce in Paris with the seat in Zurich“. The Court held that the clause was void because it was ambiguous as to whether the parties’ disputes should be arbitrated under the auspices of the ICC or the Zurich Chamber of Commerce, as each had its own competent permanent arbitration institution (see R. Doak Bishop, “Drafting the ICC Arbitration Clause” at fn 15, available here).

“Any dispute…between the Parties arising out of or relating to this Agreement which cannot be settled amicably shall be referred to and determined by arbitration in the Hague under the International Arbitration Rules” (Failed – PCA declined to accept the matter; see also US Court’s refusal to compel arbitration pursuant to this clause in Marks 3-Zet-Ernst Marks GmbH & Co KG v. Presstek Inc.,  455 F.3d 7 (1st Cir. 2006).

Naming specific arbitrator

A problem arises where the arbitrator is unable or unwilling to act. A more esoteric version of this defect is where an institution is designated as the arbitrator. The following clause was not upheld (see Law and Practice of International Commercial Arbitration (4ed) at [3-69]).

“All disputes arising in connection with the present agreement shall be submitted in the first instance to arbitration. The arbitrator shall be a well-known Chamber of Commerce (like the ICC) designated by mutual agreement between both parties”.

Appointing body unable or unwilling to act

“Disputes arising in connection with this agreement shall be determined by a single arbitrator to be appointed by the Director General of the World Health Organization” (The Director-General of the WHO refused to act as appointing authority. As a result, the ICC appointed an arbitrator following the refusal. The ICC’s appointment of the arbitrator was upheld by the Swiss Federal Tribunal in Judgment of 16 April 1984, 1986 Rev. arb 596, which is recounted in Gary Born, International Commercial Arbitration Vol 1 at p. 683)

Inherently inconsistent or convoluted

“20.2.2.(c) This arbitration agreement is subject to English Law and the seat of the arbitration shall be Glasgow, Scotland. Any such reference to arbitration shall be deemed to be a reference to arbitration within the meaning of the Arbitration Act 1996 or any statutory re-enactment.” – (Upheld as an English arbitration clause with Glasgow as the venue of the arbitration hearings in Braes of Doune Wind Farm v Alfred McAlpine [2008] EWHC 426 (TCC))

“In case of any disputes deriving from the [Sales] Contract, the parties agree that it should be competence of the Arbitration Court of the International Chamber of Commerce of Zürich in Lugano. The language of arbitration will be Italian. The law applied will be Swiss law” (Upheld as an ICC arbitration clause and not as a Zurich Chamber of Commerce clause, see Decision of the Swiss Federal Supreme Court of 5 December 2008, DFT 4A_376/2008, more details here.)

Inconsistency with other clauses

“7. Law and Jurisdiction

It is agreed that this Policy will be governed exclusively by the laws of Brazil.

Any disputes arising under, out of or in connection with this Policy shall be subject to the exclusive jurisdiction of the courts of Brazil.

12. Arbitration

In case the Insured and the Insurer(s) shall fail to agree as to the amount to be paid under this Policy through mediation as above, such dispute shall then be referred to arbitration under ARIAS Arbitration Rules.

…

The seat of the arbitration shall be London, England.”

The English Court of Appeal held that the governing law of the above arbitration clause was English law, see Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others, [2012] EWCA Civ 638. For more details, see our post here.

“15 ARBITRATION

All disputes under this Agreement shall be submitted for resolution by arbitration pursuant to the Rules of conciliation and Arbitration of the International Chamber of Commerce in effect as of the date any dispute arose.

22 GOVERNING LAW AND JURISDICTION

22.1 This Agreement shall be governed and construed in accordance with the laws of The Republic of Singapore.

22.2 Each of the parties to this Agreement agrees for the exclusive benefit of the others ( sic ) that the courts of The Republic of Singapore shall have jurisdiction to hear and determine any suit, action or proceedings and to settle any disputes which may arise out of or in connection with any Governing Document (respectively “Proceedings” and “Disputes”) and, for such purposes irrevocably submits to the jurisdiction of such courts.

22.3 …”

The above arbitration clause was upheld in P. T. Tri-M.G. Intra Asia Airlines v Norse Air Charter Limited, [2009] SGHC 13. The Singapore courts exclusive jurisdiction clause was read in conjunction with the arbitration clause to mean that the Singapore courts had supervisory jurisdiction over any arbitration initiated pursuant to the clause, see our discussion of the case here)

Conclusion

Many arbitration institutions provide for model arbitration clauses, see for example, the SIAC, ICC, HKIAC, LCIA, KLRCA, KCAB and ICDR (AAA). Parties who have chosen a particular institution to administer their arbitration would be well advised to adopt those model clauses to mitigate the risks of a jurisdictional fight.

Nonetheless, model clauses are not perfect for each and every situation and should be considered and tailored in certain situations. For example, where parties are in different jurisdictions, where the likely remedies required are not for monetary compensation and where the counterparty is a state-owned enterprise or a state. For more details, we have a guidance note on “How to Draft an Effective Arbitration Clause and Arbitration Agreement”. It contains sample arbitration agreements and clauses and also deals with issues such as choosing between administered and ad hoc arbitration, the number of arbitrators and method of selection, the choice of arbitration rules and the important of the place of arbitration. We also have a separate guidance note on Costs in Arbitration, which includes a table of the comparative costs of having an arbitration administered by the major arbitration institutions.