This is my speech at the In-house Con­gress in Jakarta, Indone­sia, on 23 April 2014. It was on why it’s import­ant your com­mer­cial con­tracts con­tain an arbit­ra­tion clause that works well.

Full moon at midnight

The Midnight Clause

Almost sounds a bit romantic. But is it? What is a mid­night clause?

I don’t know who coined the phrase, but the scen­ario is that of lengthy, exhaust­ing con­tract nego­ti­ations last­ing the entire day, stuffy con­fer­ence room, with the parties dis­cuss­ing the terms and their law­yers ren­der­ing impromptu advice and tak­ing everything down in black and white. Then, at the very end of it, in the deep of the night, when every­one only wants to go home, someone remem­bers some­thing: per­haps we also need a dis­pute res­ol­u­tion clause?

Yes, but of course! (Oh man, really?!)

And someone puts in a dis­pute res­ol­u­tion clause, fast and without much con­sid­er­a­tion. Can we go home now?

As a con­sequence, what finds its way into the con­tract fast and incon­sid­er­ately isn’t always the most fit­ting solu­tion. And this does­n’t apply only to dis­putes the parties want to sub­mit to arbit­ra­tion. It applies in the same way to lit­ig­a­tion or any altern­at­ive dis­pute res­ol­u­tion. But today, let’s shine a light on this from an arbit­ra­tion angle.

Off the Peg or Bespoke?

The situ­ation has improved some­what since many arbit­ral insti­tu­tions provide mod­el dis­pute res­ol­u­tion clauses. But it’s already mid­night, remem­ber? There is the risk that con­tract drafters simply copy such a mod­el clause and paste it into the draft con­tract. That, then, is like wear­ing a ready-made suit.

And what is a ready-made suit? It can be the best solu­tion for those with stand­ard meas­ures. Doesn’t take long to get, reas­on­ably priced, and look­ing good. Like­wise, a well-craf­ted mod­el clause may just be the right thing for a stand­ard contract.

But for those of us with non-stand­ard cor­pu­lence, or height, or short­ness, or with one arm longer than the oth­er, a ready-made suit may not be – suit­able. Tail­or-made may look bet­ter. Like­wise, where our con­tract deals with any­thing out of the ordin­ary, it may be bet­ter to make it to meas­ure. And that would include the dis­pute res­ol­u­tion clause. Because if this clause suf­fers from a ser­i­ous defect, dis­pute res­ol­u­tion may just not work as intended.

Now, all this is very gen­er­al and refers to good con­tract draft­ing and as such is noth­ing spe­cif­ic to arbit­ra­tion. Of course you should draft every con­tract clause in such a way that it is con­sist­ent, cer­tain and oper­able. But we’re here to take a look at the rami­fic­a­tions on arbitration.

The Fitting

Let’s take a look at two scen­ari­os. First, where the mid­night arbit­ra­tion clause is so amiss that, if we apply our ana­logy again, one would­n’t say this is a fit­ting suit. Rather, this thing is so mis­cut and ugly you can hardly call it a suit. Second, where the mid­night arbit­ra­tion clause is flawed but per­haps can be used if you inter­pret it right. An ill-fit­ting suit I should­n’t be wear­ing on the street. But per­haps it looks bad on me only, and even I can still tug it into place for one fam­ily photograph.

The Miscut: Hopeless

For both parties is a decision of Lloyd or Vienna stock exchange bind­ing and both will sub­jug­ate to the Inter­na­tion­al Cham­ber of Commerce.

This is a real-life dis­pute res­ol­u­tion clause but, as a text­book on arbit­ra­tion puts it (Red­fern and Hunter on Inter­na­tion­al Arbit­ra­tion, 5th edi­tion 2009, at 2.180), it’s simply mean­ing­less. It doesn’t make clear who is to decide a dis­pute. It does­n’t say if the dis­pute is to be settled by arbit­ra­tion, medi­ation or con­cili­ation, or some oth­er pro­ced­ure. And what for any­way will both parties sub­jug­ate to the Inter­na­tion­al Cham­ber of Commerce?

New York Fashion

Take a look at the New York Con­ven­tion on the Recog­ni­tion and Enforce­ment of For­eign Arbit­ral Awards. This New York Con­ven­tion does­n’t only deal with the recog­ni­tion and enforce­ment of inter­na­tion­al arbit­ral awards, as its name implies. It also deals with the val­id­a­tion of inter­na­tion­al arbit­ra­tion agree­ments. Its art­icle II (3) reads as follows:

The court of a Con­tract­ing State, when seized of an action in a mat­ter in respect of which the parties have made an agree­ment with­in the mean­ing of this art­icle, shall, at the request of one of the parties, refer the parties to arbit­ra­tion, unless it finds that the said agree­ment is null and void, inop­er­at­ive or incap­able of being performed.

All arbit­ra­tion is based on the parties’ agree­ment to arbit­rate. Where there’s no such agree­ment, state courts are less inclined to let go of their jur­is­dic­tion. In the words of the New York Con­ven­tion (if you read only the bold part above): ‘The court of a Con­tract­ing State shall refer the parties to arbit­ra­tion, unless it finds that the said agree­ment is null and void, inop­er­at­ive or incap­able of being performed.’

Fur­ther, this is a part of art­icle V (1) of the New York Convention:

Recog­ni­tion and enforce­ment of the award may be refused, at the request of the party against whom it is invoked, only if that party fur­nishes to the com­pet­ent author­ity where the recog­ni­tion and enforce­ment is sought, proof that:

(a) The parties to the agree­ment referred to in art­icle II were, under the law applic­able to them, under some inca­pa­city, or the said agree­ment is not val­id under the law to which the parties have sub­jec­ted it or, fail­ing any indic­a­tion there­on, under the law of the coun­try where the award was made; …

Vienna Style

Sim­il­ar word­ings can be found in the UNCITRAL Mod­el Law on Inter­na­tion­al Com­mer­cial Arbit­ra­tion, also on the set­ting aside of an award. The Mod­el Law was­n’t adop­ted by Indone­sia but by many oth­er coun­tries, hence its relevance.

What I am say­ing is this. If the arbit­ra­tion clause is draf­ted so badly that it doesn’t do what it is sup­posed to, the courts may quash it before, dur­ing, even after the arbit­ra­tion. If the courts of the arbit­ral seat quash the clause before the arbit­ra­tion tribunal has gone to or fin­ished its work, there will be no arbit­ral award. Unless the parties agree to arbit­ra­tion again, but this time in a leg­ally val­id man­ner. Unfor­tu­nately, once a dis­pute has aris­en, this is unlikely to happen.

Now, the scen­ario of an inval­id arbit­ra­tion clause is rel­at­ively clear, in principle.

The Ill Fit: Can Be Adjusted, Perhaps

The some­what more inter­est­ing cases are those of the second scen­ario. That’s the mid­night arbit­ra­tion clause which is flawed but which we may bring into shape. Maybe. Take a look at this one.

Any and all such dis­putes shall be finally resolved by arbit­ra­tion before the Singa­pore Inter­na­tion­al Arbit­ra­tion Centre in accord­ance with the Rules of Arbit­ra­tion of the Inter­na­tion­al Cham­ber of Com­merce then in effect and the pro­ceed­ings shall take place in Singa­pore and the offi­cial lan­guage shall be English.

Insigma Technology v Alstom Technology

This is the arbit­ra­tion clause of Insigma Tech­no­logy Co Ltd v Alstom Tech­no­logy Ltd, a case before the Singa­pore Court of Appeal in 2009.

Here the parties had agreed one arbit­ral insti­tu­tion, the Singa­pore Inter­na­tion­al Arbit­ra­tion Centre (SIAC), should admin­is­ter the arbit­ra­tion rules of anoth­er arbit­ral insti­tu­tion, the Inter­na­tion­al Cham­ber of Com­merce (ICC). They had done so because the SIAC is cheap­er. So there were cost con­cerns. Yet the ques­tion wheth­er this mid­night arbit­ra­tion clause would work under the law had to go all the way to the Singa­pore Court of Appeal. This took years.

From Paris…

When the parties had a dis­pute, Alstom referred it for arbit­ra­tion before the ICC. Insigma con­tested this, refer­ring to that part in the arbit­ra­tion clause which said SIAC. It also claimed the SIAC could apply the ICC Rules.

…To Singapore…

Alstom with­drew the arbit­ra­tion from the ICC and com­menced it at the SIAC. A tribunal came to being and went to work. It had to decide on its jur­is­dic­tion because now Insigma claimed this arbit­ra­tion clause – the rules of insti­tu­tion A to be applied by insti­tu­tion B – was inop­er­able, namely because the SIAC were not able to admin­is­ter the arbit­ra­tion under the ICC Rules. In oth­er words, now Insigma argued the exact oppos­ite of what they had said earli­er. Any­way, the tribunal asked the SIAC if it could admin­is­ter the arbit­ra­tion under the ICC Rules. The SIAC said yes. So the tribunal decided it had jur­is­dic­tion and issued a pre­lim­in­ary award to this effect.

…To Singapore’s Courts

Now Insigma applied to the Singa­pore High Court to have this award set aside because the arbit­ra­tion clause wer­en’t val­id due to uncer­tainty. It said a non-ICC insti­tu­tion could­n’t admin­is­ter the ICC Rules as these had so many unique fea­tures. Also, the parties had bar­gained for the ICC’s hall­mark of qual­ity. They would­n’t get that if the arbit­ra­tion ended up before the SIAC.

Contract Law Swerve

By the way, clause not val­id due to uncer­tainty. This is of course com­mon law of con­tract at work, whereby if the terms of the con­tract are uncer­tain, the parties can­’t have reached an agree­ment. The rules of inter­pret­a­tion in most civil law jur­is­dic­tions, like Indone­sia or Ger­many, give a judge more dis­cre­tion to feel out what the parties wanted, even if they didn’t say it right. I’m not sure wheth­er in a civil law jur­is­dic­tion Insigma would have pleaded that the arbit­ra­tion clause was uncer­tain. Small digres­sion. Back to the topic.

Where Were We?

The High Court rejec­ted Insigma’s argu­ment the arbit­ra­tion clause wer­en’t val­id due to uncer­tainty. It said the parties had­n’t bar­gained for any ICC hall­mark of qual­ity but for a hybrid ad hoc arbit­ra­tion before insti­tu­tion A under the rules of insti­tu­tion B. In prin­ciple there was no prob­lem with that, espe­cially since the SIAC had con­firmed they could apply the ICC Rules. So yes, as you the parties have expressed your wish to arbit­rate, go and arbitrate!

But instead, Insigma went to the Singa­pore Court of Appeal and suffered just anoth­er ham­mer­ing. The Court of Appeal had a look at the situ­ation and simply stated: ‘what the High Court said’. It also added a few gen­er­al obser­va­tions on the leg­al valid­ity of hybrid inter­na­tion­al arbit­ra­tion agreements.

Such as, you have to con­strue arbit­ra­tion agree­ments like any oth­er com­mer­cial agree­ment. This means you have to give effect to the parties’ inten­tions as expressed. (‘Stricter’ com­mon law approach!) Where parties had expressed an inten­tion to arbit­rate, they should go and arbit­rate. It does­n’t mat­ter if cer­tain aspects of the agree­ment might be ambigu­ous or even inef­fi­cient. The prin­ciples of party autonomy and effect­ive inter­pret­a­tion dic­tated that.

What the Court of Appeal said is if the parties chose a suit, they should go out and wear it. If they delib­er­ately chose an ugly but wear­able suit, they should still go out and wear it. An ugly but work­able arbit­ra­tion clause is still a work­able arbit­ra­tion clause.

Paris, of Course

This Court of Appeal rul­ing came in mid-2009 and when the ICC got wind of that, it was­n’t very enthu­si­ast­ic. So in 2012 the ICC amended its rules and added the fol­low­ing two clauses (in art­icles 1(2) and 6(2)):

The Inter­na­tion­al Court of Arbit­ra­tion (the ‘Court’) is made the only body author­ised to admin­is­ter arbit­ra­tions under the ICC Rules…

By agree­ing to arbit­ra­tion under the Rules, the parties have accep­ted that the arbit­ra­tion shall be admin­istered by the Court.

The ICC did that to dis­cour­age hybrid arbit­ra­tion agree­ments. In addi­tion, the ICC stated it would not admin­is­ter any case involving a hybrid arbit­ra­tion agree­ment and it hoped oth­er arbit­ral insti­tu­tions would do likewise.

End of story? No. We go back to Singapore.

Any dis­pute shall be settled by amic­able nego­ti­ation between two Parties. In case both Parties fail to reach amic­able agree­ment, all dis­pute out of in con­nec­tion with the con­tract shall be settled by the Arbit­ra­tion Com­mit­tee at Singa­pore under the rules of the Inter­na­tion­al Cham­ber of Com­merce of which awards shall be final and bind­ing both parties…

HKL Group v Rizq International

This is the uned­ited (except for the part in bold type) mid­night clause which in Feb­ru­ary 2013 ended up in the Singa­pore High Court, in HKL Group Co Ltd v Rizq Inter­na­tion­al Hold­ings Pte Ltd. The new ICC Rules were already in place, yet the parties here had agreed on hybrid arbit­ra­tion again. That is to say they had agreed on arbit­ra­tion before ‘the Arbit­ra­tion Com­mit­tee at Singa­pore’ under ICC Rules. Oth­er issues aside, you can see this is a mid­night clause because such an entity does­n’t exist.

There were new ICC-only clauses in the ICC Rules, but the court held the rules of an arbit­ral insti­tu­tion could­n’t bind two parties and there­fore pro­hib­it a hybrid arbit­ra­tion clause. This would be against the parties’ free­dom of con­tract. Also, no rules of an arbit­ral insti­tu­tion could cur­tail the power of a court to inter­pret an arbit­ra­tion clause which provides for hybrid arbitration.

The court ruled this was a val­id arbit­ra­tion clause. Not a good one, per­haps, but one you can make work. You know, if it doesn’t fit, use a big­ger ham­mer. There is no Arbit­ra­tion Com­mit­tee at Singa­pore, but the parties can go and ask any arbit­ral insti­tu­tion in Singa­pore which could and would apply the ICC Rules. For example: the SIAC.

The High Court said: this suit isn’t pretty, but pull here and tug there and it will be alright for tak­ing one pic­ture, if you stand straight.

Clothes Make the Man

With this, we’ve taken a look at two not so great arbit­ra­tion clauses – text­book examples of mid­night clauses – and where the parties using them ended up. This was to exem­pli­fy the unwar­ran­ted risk which lies in mid­night clauses.

When a leg­al dis­pute arises, quite often the rela­tion­ship between the parties would break down so com­pletely that one party will do all it can to res­ist all forms of dis­pute res­ol­u­tion. In arbit­ra­tion, this party may chal­lenge the jur­is­dic­tion of the tribunal, boy­cott the pro­ceed­ings entirely, seek a court order to set aside the award on the ground the arbit­ra­tion agree­ment is void, or res­ist enforce­ment of the award. Or even all of the above, one by one.

In a scen­ario like Insigma or Rizq the party may rely on the new art­icles of the new ICC Rules. If in any of those instances the party man­aged to get a court to declare the arbit­ra­tion agree­ment inval­id, the entire arbit­ral pro­cess would go to waste. A huge risk for the inno­cent party to take. This risk is entirely unwar­ran­ted, because the use of a good arbit­ra­tion clause would avoid it. Good can mean ready-made or tail­or-made, it doesn’t mat­ter. As long as it is good.

Risks, Consequences, Costs, Delays

In addi­tion: think of the inher­ent costs and delays! In Insigma v Alstom, Alstom first filed a request for arbit­ra­tion with the ICC in August 2006. After Insigma objec­ted, Alstom com­menced arbit­ra­tion through the SIAC in Novem­ber 2006. Insigma objec­ted again. When in Decem­ber 2007 the arbit­ral tribunal ruled it had jur­is­dic­tion to arbit­rate, Insigma applied to the High Court of Singa­pore, which rendered its judg­ment in August 2008. Insigma finally appealed to the Court of Appeal, which gave its judg­ment in June 2009. It took the parties nearly three to obtain a final determ­in­a­tion on wheth­er the arbit­ra­tion clause was valid.

Worth It?

And you know what? At the end of it Alstom got a final award against Insigma over 30 mil­lion US dol­lars but couldn’t even enforce it where it wanted to. It would have worked in Hong Kong, but that’s not really where Alstom wanted to go. Insigma’s main assets were in main­land China. There, it did­n’t work.

Why? The Supreme People’s Court, just like the Singa­pore Court of Appeal, held this hybrid arbit­ra­tion clause was an agree­ment to arbit­rate ad hoc. But Chinese law does­n’t recog­nise ad hoc arbitration.

The Suit Bag

Mid­night clauses. My takeaway points, obvi­ously, are these. It is often wise to agree to arbit­rate. But one should­n’t under­es­tim­ate the phras­ing of the arbit­ra­tion clause, or the advant­ages of arbit­ra­tion may not come into effect. Parties should pay atten­tion to the phras­ing. Else they run the risk of costly jur­is­dic­tion­al fights before or par­al­lel to the hear­ing of the merits.

That’s why: don’t let your arbit­ra­tion clause be a mid­night clause. Give this clause some con­sid­er­a­tion, if not more.

John Travolta's suit in Saturday Night Fever

But if it is already mid­night, make sure you and your law­yers get some fresh air and enough cof­fee before you draft the clause.

Or, to strain our ana­logy one last time: above all, make sure you choose a suit in the first place. Then, try to choose one that fits. Ideally, try to choose one that looks hand­some. At any time of day.