Arbitration clauses are largely overlooked in contractual negotiations because, at the time of negotiating a contract, the parties are understandably more concerned with the substance of their agreement than with dispute resolution for problems arising from it. However, with the obvious benefits of Alternative Dispute Resolution (ADR) and its voluntary nature, it behooves contracting parties to include clear and enforceable ADR clauses in their contracts. This ensures that, should a dispute arise, procedures for its resolution will already be in place. Common sense suggests that determining the method of dispute resolution after a problem has arisen is a difficult and uncertain process, as parties may not act rationally at that time.
Despite the relative simplicity of clear and unambiguous arbitration clauses some parties merely state that they agree to arbitrate any disputes arising under an agreement. Such a brief statement might be adequate to impose arbitration in the first instance. However, while expressing the parties’ intent to arbitrate disputes, it still leaves many crucial issues unresolved. The following is one of the arbitral clauses suggested by the American Arbitration Association:
“We, the undersigned parties, hereby agree to submit to arbitration administered by the American Arbitration Association under its [applicable] rules in the following controversy [cite briefly]. We further agree that we will faithfully observe this agreement and the rules, and that we will abide by and perform any award rendered by the arbitrator(s) and that a judgment of the court having jurisdiction may be entered upon the award.”
The above clause, although succinct, has consistently received judicial support and has been highly successful in imposing arbitration in over a million disputes. However, the effectiveness of an arbitration clause does not depend on the employment of the American Arbitration Association’s procedural rules. As arbitration is consensual in nature, parties may choose any procedural rules they agree upon or may even create their own. Because it is difficult to anticipate all problems, procedural or otherwise, that may arise during arbitration, it is useful to designate a set of rules promulgated by one of the many international organizations and to make modifications that may be appropriate for a particular situation.
When drafting an arbitration agreement, there are many elements that can be addressed if the standard clause does not meet the contracting parties’ needs, or if the parties want more certainty on particular issues. Parties are free to contract for anything involved in the arbitration from where and how the arbitration will take place to how the arbitrators will be selected. Regardless of what the parties choose to put in their arbitration clause, the choice of law should be expressly decided prior to a dispute arising because the substantive law that is applied could radically change the outcome of a disagreement.
Enforcement of arbitration clauses in Mexico
In the late nineteenth and early twentieth centuries, Latin American countries used Calvo clauses as a means of protecting themselves from foreign companies that would invest in Latin American resources and use diplomatic intervention to ensure better protection of their investments than that afforded to Latin American nationals. By mid-1993, Mexico had radically revamped its commercial arbitration law to conform to international standards and avoid this problem by defining enforceability of arbitration clauses, the scope of an arbitrator’s jurisdiction, the recognition of foreign awards, arbitral procedure and the selection of arbitrators.
The most important issue for international parties is not the specific content of the local arbitration laws, but whether or not a country consistently enforces arbitration clauses and arbitral awards. Currently, Mexico enforces general arbitration clauses that indicate willingness by parties to arbitrate any future disputes.
Still, the drafting of an arbitration clause is critical to ensure the maximum degree of certainty for the parties involved. International arbitration clauses should be written with the understanding that terminology might not be uniform in different countries. For example, the United States and Mexico use vastly different definitions for terms in contract law. A drafter must be cognizant of contextual irregularities and careful in choosing the proper words to convey what the parties intend. Essentially, an international arbitration clause needs to be drafted in such a way that it will be sustained in every jurisdiction where it is foreseeable that it will be tested.
Enforcement of arbitration clauses in the United States
It is clear under the Federal Arbitration Act that a party may bring an action in federal court to compel arbitration if the opposing party is uncooperative in voluntarily submitting to arbitration. If one party files suit in violation of the arbitration agreement, the other party may move for a stay pending arbitration. All the court has to do is determine whether there is a valid arbitration agreement in order to compel arbitration. The prevailing view of the U.S. Courts is that agreements to arbitrate should be treated and enforced as contracts.
However, the same power to enforce an arbitration clause is not transferred to the enforcement of mediation clauses. An agreement to mediate future disputes is not supported by judicial enforcement either through common law or statute. This means that parties who have a mediation clause that does not allow for arbitration rely on it at their own risk. Should a disputant refuse to submit to mediation, there is nothing the opposing side may do to compel mediation and the dispute will have to be litigated unless the parties can agree on a different type of dispute settlement mechanism. Nevertheless, settlements reached through mediation are readily enforceable by the court under a standard contract theory.