In our earlier article, we discussed the implications of the Arbitration (Amendment) Ordinance 2017 and the factors to consider when deciding whether to settle Intellectual Property Right (“IPR”) disputes by arbitration.
Since arbitration can only take place with the consent of all parties, a crucial first step is to create a valid, enforceable arbitration agreement that reflects the consensus of the parties. In the majority of cases this will be the “arbitration clause” included in the parties’ agreements and contracts.
A poorly drafted arbitration clause can cause time-consuming and costly delays to the arbitration process, and in a worst-case scenario, could even result in the clause being declared invalid or unenforceable.
In this article we identify some key issues to note when drafting an arbitration agreement.
Drafting of Arbitration Clauses – A basic arbitration agreement should at least cover the following:
Scope of the arbitration agreement
Have your arbitration clause wide to cover all disputes arising out of or in relation to the contract, including pre-contractual and tort claims, unless you intend to carve out disputes for separate determination e.g. if you want a mechanism for expert determination for pricing or technical disputes.
Words such as “disputes relating to” or “arising in connection with” rather than “arising under” are best used to avoid the risk that certain claims or disputes are found to be outside the jurisdiction of the arbitral tribunal, and to avoid unnecessary argument, although there is a presumption that parties intend to have a one stop adjudication of disputes.
Composition of the arbitral tribunal
The number of arbitrators, either one or three, should be specified. The choice of the number of arbitrators depends on the size and complexity of likely disputes, the need for technical expertise, and the importance of cultural representation – having a party-appointed arbitrator that understands how companies from certain countries operate, and their systems and processes.
Method of selecting the tribunal
The method of selecting arbitrators is usually provided either in the institutional rules or in the arbitration clause. A sole arbitrator is appointed by the institution in default of agreement by the parties. For a tribunal of three, the claimant and respondent (or joint claimants or joint respondents) nominate one arbitrator each, with the third arbitrator, who acts as the presiding arbitrator, nominated by either the two party arbitrators or the institution, for confirmation by the institution of their appointment. Consideration should be provided in the arbitration clause for the two party arbitrators or the parties to choose the presiding arbitrator if the institutional rules state that the presiding arbitrator shall be chosen by the institution. Some institutional rules also require that the parties choose their party arbitrator from the institution’s list or panel of arbitrators. If that is the case, the parties should stipulate in their arbitration clause that they can appoint party arbitrators who are not on the institution’s panel. If there is no requirement for the sole arbitrator or presiding arbitrator to be a nationality other than that of the parties in the institutional rules, then this should be stated in the arbitration clause.
Parties should specify the seat of the arbitration: where the arbitration is conducted for legal purposes, and which determines the procedural law governing the arbitration (i.e. if an arbitration is seated in Hong Kong, the Hong Kong procedural rules relating to arbitrations (the Arbitration Ordinance (Cap. 609)) apply). It is important that the parties select a jurisdiction that has ratified the New York Convention since this is significant in the context of the enforceability of the award, and a jurisdiction in which the laws and courts are friendly to arbitration and rarely set aside arbitration awards.
Pick an institution (or appointing authority if ad hoc arbitration)
Parties have a choice between institutional arbitration – which is administered by one of the many institutions such as the ICC, HKIAC, SIAC, etc, or ad hoc arbitration, which does not designate an institution and uses non administered rules such the UNCITRAL Arbitration Rules. Ad hoc arbitration is invalid in mainland China.
In ad hoc arbitration, the parties have to organize the proceedings themselves. They save on institutional fees but enjoy less certainty and support provided by an institution.
We recommend choosing institutional arbitration when there is a complex and valuable transaction, potential difficulties with enforcement of the award, and when you are more likely to be the claimant.
Be careful not to mix and match institutions with rules, e.g. SIAC administering the ICC rules.
Applicable law of the arbitration agreement
The arbitration agreement is distinct and severable from the underlying contract. The governing law of the arbitration agreement determines the validity or otherwise of the arbitration agreement. If the governing law of the arbitration agreement is not specified, the arbitration agreement could be governed by the underlying law of the contract, or it could follow the law of the seat of arbitration. Parties should specify the governing law of the arbitration agreement if the law of the underlying contract and law of the seat of the arbitration is different.
Language of arbitration
The language of the arbitration should be specified to prevent disputes on this issue upon commencement of arbitration. The language will not only impact on translations but the choice of arbitrator. Be careful with stipulating more than one language for the arbitration to be conducted as it means an increase in time and costs, and it does not necessarily work well in practice.
Where disputes concern IPRs, the following additional points should be taken into account when drafting arbitration agreements:
Scope of the arbitration agreement
As an arbitral award will need to be enforced through the courts, some parties prefer that decisions relating to infringement be determined by the competent court so that enforcement actions can be taken immediately against the non-compliant party. In that event, parties can exclude from the scope of the arbitration agreement disputes relating to infringement of IPRs, and leave other issues (e.g. breach of contract) to be settled through arbitration. However, this may lead to arguments as to which is the proper forum for dispute resolution once a dispute arises. For example, if a licensee alleges a breach of contract by the licensor in arbitral proceedings, one defence and counterclaim by the licensor could be an infringement of IPR, and there would be a dispute as to the proper forum for such claims to be raised. Legal advice should be sought and careful drafting is required.
Dealing with validity of IPRs
In Asia, Hong Kong is the first jurisdiction to clarify the arbitrability of IPR, and that an award dealing with IPR is not against public policy. In some jurisdictions, this is unclear, leading to parties attempting to litigate disputes relating to IPRs (such as patent disputes).
While the litigation of such disputes in breach of an arbitration agreement can be either stopped by a stay of proceedings in favour of arbitration or an anti-suit injunction (before the courts of the seat of arbitration, an emergency arbitrator, or arbitral tribunal once constituted), the parties could add wording to clarify that all disputes, including disputes arising out of IPR, shall be resolved by arbitration (e.g. “including with respect to the validity of intellectual property rights”) to put beyond doubt that such issues are within the scope of the arbitration agreement.
Qualifications of arbitrators
Parties may also wish to specify the required or desired qualifications of the arbitrator (e.g. an intellectual property lawyer or patent attorney in the field of life sciences with no less than 15 years of experience), but to the extent that such qualification are expressed in mandatory terms, parties should ensure that the specifications are not overly restrictive as it may ultimately be difficult to find suitable arbitrators who are both qualified and able and willing to accept the appointment.
Apart from the governing law of the arbitration agreement and the underlying contract, you might also wish to consider whether it is necessary to specify the law under which specific issues are to be determined.
For example, if there are issues of infringement to be determined and infringement occurs in different jurisdictions, it would be useful to specify whether issues of infringement should be determined under the laws of one particular jurisdiction. Otherwise, determining issues of infringement in different jurisdictions according to the respective local laws will be costly as the parties will need local law expertise. Furthermore, applying different laws to the same factual basis could well lead to different outcomes in different jurisdictions.
Whilst many arbitration institutions publish suggested arbitration clauses, we strongly recommend that you seek legal advice when incorporating such clauses into your IPR agreements in order to avoid issues that could potentially result in expensive and time-consuming problems subsequently when disputes arise.