Arbitration clause in a contract – what is it and how to draft it?

For many years, arbitration has been a viable alternative to litigation in the state courts – particularly in international contracts or in relationships where confidentiality and the swift resolution of disputes are a priority. A properly drafted arbitration clause helps to avoid lengthy litigation, gives the parties greater influence over the course of the proceedings, and allows for the appointment of arbitrators with specialist industry knowledge in the relevant field.

Definition and essence of an arbitration clause

An arbitration clause, also known as an arbitration agreement, is a contractual provision in which the parties undertake that any disputes arising from a specific legal relationship will be resolved not by the ordinary courts, but by a selected arbitral tribunal. It constitutes a form of procedural agreement – distinct from the main provisions of the contract – the effect of which is to transfer jurisdiction to resolve the dispute to a body other than a state court.

The arbitrability of disputes is set out in Article 1157 of the Code of Civil Procedure (hereinafter ‘CCP’), pursuant to which, unless otherwise provided by a specific provision, the parties may submit to an arbitral tribunal disputes concerning property rights or non-property rights – which may be the subject of a court settlement, with the exception of maintenance cases. However, disputes in which the law excludes the possibility of a settlement (e.g. concerning the status of natural persons) may not be subject to arbitration.

Arbitration clause – in accordance with Article 1162(1) and (2) of the Code of Civil Procedure – must be drawn up in writing or recorded in another manner enabling its content to be ascertained, e.g. in correspondence exchanged between the parties or in statements made via means of distance communication that allow its content to be recorded. It is also permissible to refer in the contract to another document containing such a provision, provided that it makes the clause an integral part of the contract.

For the provision to be effective, the arbitration clause must specify:

• the subject matter of the dispute or the legal relationship from which the dispute arises or may arise,
• the chosen arbitral tribunal (e.g. the Court of Arbitration at the Polish Chamber of Commerce in Warsaw),
• a reference to the rules of arbitration,
• the place of arbitration (the so-called seat of arbitration),
• the language of the proceedings (e.g. Polish, English),
• the number of arbitrators and the method of their appointment (e.g. a single arbitrator or a panel of three arbitrators),
• the law applicable to the resolution of the dispute,
• where applicable, the rules on the allocation of costs.

It is important to use categorical wording, e.g. “the dispute shall be resolved by an arbitral tribunal” or “the arbitral tribunal shall render a final award in the matter”. Vague phrases such as “the dispute may be submitted to arbitration” or “an award may be made” may render the clause invalid due to the lack of a clear commitment by the parties. This is confirmed by the Supreme Court’s judgment of 10 December 2003 in case no. V CK 27/03, which states: “It is not permissible to submit to arbitration all disputes that may arise in the future, without specifying a particular legal relationship.” Furthermore, the wording of the clause must not favour one party – for example, by granting that party the exclusive right to choose the arbitral tribunal or the method of adjudication.

An arbitration clause may be included in the main contract, contained in a separate agreement (compromise) following the emergence of a dispute, or – in the case of companies – in the articles of association or partnership agreement (although in the latter case, the regulations impose additional requirements, e.g. the obligation to announce the commencement of proceedings in the manner prescribed for company announcements).

Advantages of arbitration – when is it a good choice?

Arbitration is an alternative dispute resolution method which, in many cases, can be more effective than traditional proceedings before a court of general jurisdiction. Arbitration proceedings usually take significantly less time than court proceedings. The short waiting time for a ruling allows the parties to resolve the dispute quickly and avoid the lengthy procedures that often accompany court proceedings. Furthermore, the parties have complete freedom in selecting both the arbitral tribunal and the arbitrators. They may choose individuals with specialist knowledge and experience in the field to which the dispute relates.

Another advantage is that arbitration proceedings are confidential. Neither the conduct of the case nor its outcome is made public. This is particularly important in commercial disputes, where the protection of confidential data, business strategies or customer information is crucial.

Although arbitration offers many benefits, it is not without its limitations. In many cases, arbitration is cheaper than court proceedings, especially when the dispute is resolved quickly. However, it should be borne in mind that the parties cover the arbitrators’ fees, administrative costs and any legal representation costs. These may be limited by provisions in the arbitration clause, but arbitration does not always mean lower costs.

Summary

An arbitration clause is a small part of a contract that can have a huge impact on how potential disputes between contracting parties are resolved. Its correct formulation ensures predictability of the procedure for businesses, the possibility of utilising a specialised adjudicating panel, as well as a guarantee of confidentiality and speed of proceedings. In an international context, it is also a tool for avoiding difficulties arising from differing legal systems or language barriers

A well-drafted arbitration clause acts as a form of ‘insurance’ in the event of a dispute. Whilst it is best for a dispute never to arise, experience shows that in business it is worth establishing clear and effective rules for its resolution in advance. If you require assistance in drafting a contract containing an arbitration clause, please do not hesitate to contact HWW.

Author

Aleksandra Chomicka

Radca prawny, Senior Associate

She gained experience in providing day-to-day legal services to individuals and entrepreneurs at a number of law firms in Warsaw specializing in corporate law and family law. At the firm, she provides services to entrepreneurs and individual clients in the field of contract and business law. As part of her professional practice, among other things, she analyzes, reviews and creates civil law contracts, prepares legal opinions in the field of civil and business law, and drafts and prepares corporate documents,…

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