Defective Arbitration Agreements? Artificial Intelligence to the Rescue!
“By failing to prepare you are preparing to fail.” — Benjamin Franklin [1]
Arbitration serves as an effective means for settlement of a dispute outside the costly court system by bringing it before a disinterested third party for resolution. [2] It is a process that involves a systematic series of actions that result in the drawing up of an arbitration agreement. This generic concept comprises two basic types: a clause that is a part of the contract between the parties to provide for any dispute that may occur in the future and an agreement by which the parties to a dispute that has already arisen submit the dispute to arbitration (known as the submission agreement).[3] This finest tool however might be subject to abuse if the arbitration agreement is drafted without reasonable attention. Clarity is the key word for its drafting. As argued by Fouchard, unconscionable, vague and therefore defective clauses may disrupt the smooth progress of arbitration [4] or even result in the failure of the arbitration agreement. [5] The consequences may vary depending on the magnitude of the error. Hence, understanding the link between defective arbitration agreements and the process of arbitration seem to be crucial for the parties in order to have their disputes arbitrated.
To understand the idea of defective arbitration agreements and their consequences, this note is divided into four interrelated sections. The first explains the background to the term. The second examines what defective arbitration agreements are and considers some of the most typical examples. The third part of this paper deals with the effects of defective arbitration agreements from the perspective of the relevant applicable law and the consequences of making mistakes when drafting an arbitration agreement. It is argued further that the consequences could be avoid by employing artificial intelligence (AI) to draft the arbitration agreement in the first place. The last two decades have witnessed advancements in AI. Yet, arbitration, forming part of the legal services industry, has been so far practically unaffected by such developments. Looking to the future, AI could play a significant role when drafting suggestions for arbitration clauses, helping clients and lawyers identify blind spots and bulletproof their interests. Furthermore, this note deals with whether or not defective arbitration agreements are doomed to destroy the parties’ intention to have their disputes arbitrated. Finally, the last section offers a conclusion as to the findings.
The Background to the Terms
Frédéric Eisemann, former Secretary-General of the ICC International Court of Arbitration, created the phrase ‘clauses pathologiques’ or ‘pathological clauses’ in the 1970s. [6] In his view, there are four essential functions of an arbitration clause. The first one (which is common to all agreements) is to produce mandatory consequences for the parties involved. The second function is to exclude or to minimise the intervention of the courts in the process of arbitration, at least before an award is issued. The third one is to maximise the empowerment of the arbitrator to settle the dispute which is likely to arise between the parties. Finally, the fourth function is to produce a process that allows the parties to adopt the most efficient and cost-effective procedure leading to a resolution of their dispute and to an award that is judicially enforceable. [7] Eisemann referred to those arbitration agreements that do not achieve these functions or which deviate from any one of the above four functions as ‘pathological or defective clauses’. However, the extent to which an arbitration agreement is defective depends on the extent of the deviation from those assigned duties or activities.
Artificial intelligence (AI) on the other hand, has been defined as one or more computer programmes with an ability to create work that is unforeseen by humans. Both arbitration and AI are leading alternatives to the status quo: arbitration to traditional dispute resolution, AI to traditional methods of production. The former promotes freedom from the judiciary, the latter freedom from cognitive limitations. Beyond that, comparisons would appear, artificial. Having established that the following section examines agreements which can, for a number of reasons, be termed defective.
Examples of Pathological Agreements
Essentially, an arbitration agreement needs to be lucid and transparent if it is to be successful in producing the desired or intended results. Furthermore, the parties should ensure that the agreement is adjusted to the specific needs of the individuals concerned and the circumstances of the dispute rather than being worded vaguely. Drafters of arbitration agreements must give careful consideration to a number of factors in order to avoid many complications that can arise from a badly drafted agreement. The following are some of the common issues that may result in defective arbitration agreements. The principal disadvantages found in arbitration agreements are those of inconsistency, uncertainty and inoperability.[8]
An arbitration agreement is influenced by inconsistency when the dispute resolution clause encompasses both the parties’ agreement to arbitrate, and the indication of a national court qualified to resolve contractual disputes. [9] This type of agreement does not respect the second of Eisemann's essential functions, which is to exclude or to minimise the intervention of courts in the process of arbitration.[10] Since this provision is not clearly worded, the courts are likely to be asked to intervene in the interpretation of the agreement, which in turn will cause delay.
Furthermore, an arbitration agreement is influenced by uncertainty when the sloppy multi-tiered agreement lacks clarity as to when arbitration stages begin/end and whether stages are optional or not. [11] By this same token, incertitude can arise when the arbitration agreement shows equivocation as to whether a binding arbitration is intended. [12] The problem with this type of agreement is that it is not clear whether the arbitration is mandatory or whether there is another option for resolving the dispute. The fact that there is no indication as to who is eligible to decide whether to refer the dispute to arbitration or not means that this agreement runs contrary to the first of Eisemann's essential functions, which is to produce mandatory consequences for the parties involved. [13]
An equally significant aspect of an arbitration agreement that can be regarded as pathological due to uncertainty is when an agreement is providing for a conflicting or unclear set of procedures.[14] It could also be stated that, when the arbitration agreement does not contain any reference to the applicable rules, it also creates uncertainty.[15] Once again, if the agreement is not clear and precise, court intervention will be necessary in order to interpret the wording, thus making the whole process more time-consuming and expensive. Therefore, agreement of this type does not respect the fourth of Eisemann's essential functions, namely to produce a process that allows the most efficient and cost-effective procedure for the parties. [16]
An arbitration agreement is affected by inoperability when it refers to an institution to administer the arbitration that does not exist, is misnamed, has ceased to exist or refuses to act.[17] When referring to an institute, such as the ICC, either to adopt its rules or to have its tribunal administer the proceedings, the parties should ensure that their clause refers to the official name of the chosen institution. Otherwise, a party which is averse to resolving the dispute could argue that the clause refers to another institution rather than the one intended. Furthermore, when adopting the rules of an institution without a clear understanding of those rules, especially when arbitration agreements are drafted quite hastily, the parties may agree to adopt the rules of an institution without having an in-depth knowledge of those rules. For instance, drafters might be willing to adopt the rules of the ICC in Paris although these rules might not be completely appropriate for the kind of dispute that can arise between the parties to the agreement.
Other examples of where arbitration agreements are inoperative relate to those situations where too much specificity has been provided with respect to the arbitrators’ qualifications or a specific person is named as arbitrator who is always the same person appointed, and who might be deceased or refuses to act, thus making the agreement defective. [18] Issues of inoperability may also arise when an arbitration agreement provides for conflicting or unclear procedures [19] or the scope of the arbitration agreement is too narrowly defined. [20] Hence, when drafting the arbitration agreement, the parties should be very careful in choosing the terminology, in order to avoid inadvertently restraining the scope of the arbitration, since it can have serious repercussions on the ability of the disputes that may arise to be arbitrated on.
Considering the examples listed above, we have been introduced to a series of situations whereby an arbitration agreement can be described as defective/pathological. The rationality expressed in the examples embodies the crucial issue that arises, namely whether a pathological arbitration agreement can be saved. To decide how the crucial question can be answered, the next section will examine the effects of pathological arbitration agreements from the perspective of the relevant and applicable law.
The Law Assessing the Effects of Pathological Arbitration Agreements
It would be profitable to consider the rules governing arbitration agreements to gain a perspective on how a pathological arbitration agreement should be analysed and interpreted. Arbitration derives its authority from the parties who agree not only to have their dispute arbitrated but also on the particular system of law to regulate the arbitration agreement. Therefore, it is for the system of law to establish whether it can permit insufficiency or inadequacy in the wording of an arbitration agreement to be legitimized through its rules of construction and interpretation.
It is important not to overemphasize the rationality and predictability of the parties and to take into consideration a more common scenario such as when the parties have not decided on a system of law to govern the arbitration agreement. As a result, substantial debate will take place if there are other interpretative options that may be adopted. Therefore, it is advisable, for the reasons stated above, to focus on the ‘separability doctrine’. This is to say that the arbitration agreement is autonomous from the main contract, which is an universal principle in modern arbitration. Most of the common law courts (e.g.: English courts) recognise however the existence of a general presumption under which, in the absence of a choice on which system of law will govern the arbitration agreement, the law that governs the main contract and has been expressly chosen by the parties, if any, governs the arbitration agreement.
In a scenario where the parties have not agreed on a governing law in either the main contract or the arbitration agreement, but have expressed a choice as to the venue of the arbitration, common law courts (e.g. English courts) will decide that the arbitration agreement is governed by the law of the seat. Furthermore, if neither the main contract nor the arbitration agreement provides information on the governing law and no venue is indicated in the arbitration agreement, it will be essential to assess whether the seat of the arbitration may be established indirectly, by reference to the rules of the chosen arbitral institution, if any. If no venue (directly or indirectly) can be established, then the arbitration agreement would be non-functional or incapable of being performed as stated by the New York Convention.
Considering the Convention, we may assume that US courts have an approach which is similar to that adopted by the courts in England. On the contrary, in some cases, US courts favour assessing the effectiveness of pathological arbitration agreements on the basis of the law of the country where the lawsuit had its beginning in violation of the obligation contained in the arbitration agreement. In that case, the courts will not take into account the law of the seat and/or the law governing the main contract. The question then arises as to whether prospective defendants will be willing to avoid arbitration proceedings and to begin litigation before those national courts which, on the basis of the law of the country where the lawsuit was commenced, are more likely to declare that the arbitration agreement is not efficient or capable of being performed.
In contrast to the approach followed by English and US courts (where, in the absence of choice on a system of law, the law governing the arbitration agreement is generally the law that governs the main contract), the majority of continental European civil courts such as in Sweden, the Netherlands, Belgium or Italy (with the exception of the French courts which will be analysed in the following section of that note), remain committed to the law of the seat. The approach has been justified mainly on the grounds that there is a need to ensure consistency with the separability doctrine when deciding on the law governing the arbitration agreement. Nevertheless, the assumption that the arbitration agreement and the main contract are autonomous from each other does not substantiate the inference that, in the absence of choice, the law governing the arbitration agreement must be established on the basis of the seat where the arbitration takes place.
Furthermore, for the reasons stated above, it is essential to refer briefly to the conflict of law-based approaches. This type of approach demands that domestic courts adopt the conflict of law rules in relation to the laws of the jurisdiction in which a legal action was brought when deciding on the law governing the arbitration agreement. The rules on the conflict of law vary from one country to another. National courts in one country may agree on the applicable law by reference to the place where the main contract is aimed to be performed. In other countries, however, the governing law may be selected by reference to the place where the contract was accomplished. Accordingly, national laws differ from one country to another when construing the validity of a pathological arbitration agreement. Thus, parties’ expectations may be frustrated in the event when the court concludes, on the basis of the system of law arrived at through its conflict of law rules, that the arbitration agreement is inoperative or incapable of being performed. It is, however, important to note the limitations of the rules on the conflict of law approach in that it does not promote certainty or uniformity in the search for the law governing the interpretation of the arbitration agreement.
There is a further point to be considered namely the French courts and their approach. As mentioned above, the French courts have adopted another method to determine the rules under which pathological arbitration agreements should be interpreted and this is most commonly described as the ‘substantive rule method’. The ‘substantive rule method’ represents an idea that dispute resolution ought to be detached from any national legal system. Consequently, the validity of an arbitration agreement is evaluated on the ground of parties’ common intentions, legitimate expectations and the principle of good faith. In the absence of an indicated choice of law governing the arbitration agreement, the rules governing the structure of a defective arbitration agreement ought to be established without reference to any conflict of law rules, but only on the grounds of the ‘substantive rule method’ which is strongly supported by the French courts and international arbitral tribunals. As such defective arbitration agreements should be interpreted in the light of the parties’ intentions and according to principles of good faith. By using the ‘substantive rules method’, French courts clearly want to guarantee the validity of the arbitration agreement and its absolute efficiency. In doing so, they consider that they give force to the real intention of the parties. Therefore, arbitration agreements would be justified on the basis of their own validity and efficiency, which depend solely on the parties' intention.
The above analysis reveals synergistic opportunities for both arbitration agreements and AI. In this short post, I sketch possible ways in which AI-infused tools could help the arbitration community save the arbitration agreements from defection. AI could utilize its compiled data to assist in the drafting of arbitration agreements. AI could assist in helping to build this particular agreements by identifying and compiling important sections and clauses that are necessary for that agreement or jurisdiction. Furthermore, it could locate drafting errors drafts of that agreement, alerting human drafters to problematic clauses at the early stages of the drafting process. In the area of arbitration agreement review, AI would engage in in spotting legal issues. AI would also be capable of tagging relevant clauses from a particular agreement and analyzing fairness and risk, alerting human drafters to potential pitfalls that may be latent within the agreement. AI will not completely eliminate the need for human drafters of arbitration agreements anytime soon, if ever, but it is argued that it could increasingly become an indispensable tool for arbitration and a tool saving the agreement from becoming pathological.
The essential question that arises now is whether or not a pathological arbitration agreements are doomed to destroy the parties’ intention to have their disputes arbitrated, in the first place.Without parties’ express choice as to the law governing their arbitration agreement, in case issues arise with the arbitration agreement, the parties’ common intention ought to be taken into consideration. The general idea is to give the agreements full effect, rather than preventing them from having an effect, hence enabling the parties to have their dispute arbitrated, derives its authority from the principles of good faith, fair dealing, protection of parties’ common interests and legitimate expectations. These are all conditions listed under the UNIDROIT articles. [21] In light of the above, pathological arbitration agreements affected by inconsistency, uncertainty and inoperability in every day practice should be interpreted in accordance with the principle of good faith and the protection of parties’ legitimate expectations to enable them to have their dispute arbitrated. It is only when the arbitration agreement cannot be preserved through a construction which is consistent with the need to give full effect to the parties’ will to refer their disputes to arbitration that the arbitration agreement should not be sustained.
Arbitration may be a perfect tool for having disputes resolved and contain many advantages in comparison to a traditional court trial. However, it is unfortunate that the parties, and their legal advisors, are not always mindful of how significant it is to draft the arbitration agreement reasonably and legitimately. In addition, the hybrid nature of the arbitral process, a correlation between the judicial and the contractual, requires further delicacy in the drafting of the arbitration agreement. The parties ought to be aware of issues that may arise. Here comes the AI. AI by helping to draft the arbitration agreements would empower human drafters to provide better outcomes for their clients and faster. As such, the arbitration field would stand to benefit from an embrace of AI. Without careful acknowledgement of the importance of the relevant actions when drafting the arbitration agreements and this include the involvement of AI, there is a high probability that disputes may arise that will need to be resolved in a more time and money consuming court proceedings.
References:
[1] D Axson, Best Practices in Planning and Performance Management: Radically Rethinking Management for a Volatile World, John Wiley & Sons, 2010, 74
[2]Robert Donald Fischer & Roger S. Haydock, International Commercial Disputes: Drafting an Enforceable Arbitration Agreement, 21 Wm. Mitchell L. Rev. 941 (1996)
[3]Gray, Whitmore, “Drafting the dispute resolution clause”, in Commercial Arbitration for the 1990’s, American Bar Association, 1991
[5] R Doak Bishop, A Practi- cal Guide for Drafting International Arbitration Clauses, 1 Int’l Energy L. & Tax’n Rev. 16 (2000).
[6]F. Eisemann, La clause d'arbitrage pathologique, Commercial Arbitration Essays in Memoriam, Eugenio Minoli, U.T.E.T. 1974
[7] Benjamin G. Davis, 'Pathological Clauses: Frédéric Eisemann’s Still Vital Criteria' (1991) 7 Arbitration International, Issue 4, pp. 365–388
[8]Redfern and Hunter, Law and Practice of International Commercial Arbitration (Sweet & Maxwell, 4th edn. 2004) 196
[9] “Prior to any judicial proceeding, [parties] shall submit [their disputes] to an arbitral tribunal of three members, of which each party appoints the arbitrator of its choice within a eight-days period from the request made by the most diligent party. In the event arbitrators do not agree about the choice of a third arbitrator, the latter shall be appointed by the President of the Commercial Tribunal of Versailles. If any conciliation is possible on the enforcement of this contract, only the Commercial Tribunal of Versailles shall be competent”(Société Sagua La Sablière et autre v SARL Optimal Conseil, Court of Appeal of Paris, November 20, 2003)
[10] Ibid (n7)
[11] “Disputes shall be submitted to arbitration according to the Rules of Conciliation and Arbitration of the ICC... ; disputes which may be resolved by conciliation shall be submitted first to conciliation” (Pathological Arbitration clauses, Marie-Hélène Maleville, IBLJ, n1, 2000, p.69
[12] “Any dispute of whatever nature arising out of or in any way relating to the Agreement or to its construction or fulfilments may be referred to arbitration.” (Cravat Coal Export Company, Inc. v Taiwan Power Company, USDC Eastern District of Kentucky, Civil Action n°90-11, March 5, 1990)
[13] Ibid (n7)
[14] “Disputes hereunder shall be referred to arbitration, to be carried out by arbitrators named by the International Chamber of Commerce in Geneva in accordance with the arbitration procedure set forth in the Civil Code of Venezuela and in the Civil Code of France, with due regard for the law of the place of arbitration” (Pathological Clauses: Frédéric Eisemann’s Still Vital Criteria, Benjamin G. Davis, 7 Arb. Int’l 365, 387 (1991)
[15] 'Arbitration: friendly arbitration in Hong Kong’ Continental Corp (No 2) v Vincenzo Fedele [1964] HKLR 213
[16] Ibid (n 7)
[17] “If the Seller should bring an action against the Buyer, the parties will refer to the jurisdiction of the tribunal at the Chamber of Commerce in the city of the Buyer. If it does not exist, or there exist several, the parties will refer to the jurisdiction of the Court of Arbitration of the ICC in Paris and take for the decision on the disputes the Rules of this Chamber of Commerce” (Pathological Clauses: Frédéric Eisemann’s Still Vital Criteria, Benjamin G. Davis, 7 Arb. Int’l (1991))
[18] “Parties shall appoint a Chinese speaking Arbitrator with a French law degree and a familiarity with Mid-East construction contracts” (Pathological Clauses: Frédéric Eisemann’s Still Vital Criteria, Benjamin G. Davis, 7 Arb. Int’l (1991)
[19]“Disputes hereunder shall be referred to arbitration, to be carried out by arbitrators named by the International Chamber of Commerce in Geneva in accordance with the arbitration procedure set forth in the Civil Code of Venezuela and in the Civil Code of France, with due regard for the law of the place of arbitration” (Pathological Clauses: Frédéric Eisemann’s Still Vital Criteria, Benjamin G. Davis, 7 Arb. Int’l 365, 387 (1991)
[20]“All disputes arising out of the performance of the contract, and during the term of this contract, shall be submitted to an arbitral tribunal” (Commercial Ch. of the French Cour de cassation, March 13, 1978, in Rev.arb. 1988, p.124
[21] UNCITRAL, Arbitration Rules (Art 21.1)
Bibliography:
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Ibid, see Channel Tunnel Group ltd v Balfour Beatty Construction Ltd [1993] AC 334
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Article II(3) of the New York Convention Law in
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Blessing, ‘The New International Arbitration Law in Switzerland: A Significant Step Towards Liberalism’, 5 J. Int’l Arb., 1988, p.31
Filip De Ly, The Place of Arbitration in the Conflict of Laws of International Commercial Arbitration: An Exercise in Arbitration Planning, Northwestern Journal of International Law & Business, Volume 12 Issue 1 Spring
Fouchard, Gaillard, Goldman on International Commercial Arbitration, editors Emmanuel Gaillard, Berthold Goldman, John Savage, contributor Philippe Fouchard, Kluwer Law International, 1999, page: 228
Albert Jan van den Berg (ed), International Arbitration 2006: Back to Basics? ICCA
Congress Series 2006 Montreal 13 (Kluwer Law International 2007) pp. 3 – 31
http://law.queensu.ca/international/globalLawProgramsAtTheBISC/courseInfo/courseOutlineMaterials2012/internationalCommercialArbitration/Leboulanger2006.pdf pp. 9, The Arbitration Agreement: Still Autonomous? Philippe Leboulanger, J.P.N. Harb; "How French Law Treats Pathological Arbitration Clause"
TDM 5 (2007), www.transnational-dispute-management.com
UNIDROIT principles, Article 1.7, Article 4,