Arbitration clause: five decisions to make before signing

The dispute resolution clause is often drafted last and in a hurry, when no one wants to reopen the negotiation. Yet those few lines decide who will resolve a future dispute, where, in what language, and whether the award can be enforced where the counterparty holds its assets. An ambiguous clause takes to the courts the very dispute the parties wanted to keep out of them.

The Código de Comercio (Commercial Code, Articles 1415 to 1480) governs commercial arbitration seated in Mexico. The arbitration agreement may take the form of a clause in the contract or of a separate agreement (Article 1416), and it must be in writing (Article 1423); the clause is autonomous: the nullity of the contract does not, by itself, invalidate it (Article 1432). If a matter the parties agreed to arbitrate is brought before a court, the court will refer it to arbitration when a party so requests in its first submission on the merits, unless the agreement is null, inoperative, or incapable of being performed (Articles 1424 and 1464). Whatever the clause leaves unsaid is supplied by the law or by the chosen rules, which often leave it to the arbitral tribunal or to the institution (see the table of default rules).

Based on the model clauses of the Centro de Arbitraje de México (Mexico Arbitration Center, CAM), the Cámara Nacional de Comercio de la Ciudad de México (Mexico City National Chamber of Commerce, CANACO), and the International Chamber of Commerce (ICC):

1. Institutional or ad hoc arbitration, and which rules

   An institution (CAM, CANACO, ICC) provides rules, appoints arbitrators in the event of a deadlock, and oversees time limits and costs; ad hoc arbitration requires the parties to provide for everything. Refer to the institution and its rules by their exact names (Article 1417).

2. Seat: city and country of the arbitration

   It is the legal place of the proceedings, even if hearings are held elsewhere (Article 1436). With a seat in Mexico, applications to set aside are heard by the court of the place of arbitration (Articles 1415, 1422, and 1457); with a seat abroad, by the courts of that country, although in Mexico the rules on referral, interim measures, and enforcement still apply (Article 1415).

3. Language and law governing the merits

   The language governs written submissions, hearings, and the award (Article 1438). Unless otherwise stated, choosing the law of a country refers to its substantive law, not to its conflict-of-laws rules; deciding as amiable compositeur or ex aequo et bono requires express authorization (Article 1445).

4. Number of arbitrators and how they are appointed

   A sole arbitrator usually reduces costs and time; three are advisable in complex matters. In an ad hoc arbitration with three arbitrators, absent another agreement, each party appoints one and those two appoint the third; if any of them is not appointed within thirty days, any party may ask the court to make the appointment (Article 1427). In institutional arbitration, the rules govern.

5. Scope of the clause and interim measures

   Cover all disputes arising out of or relating to the contract, including its validity and termination. The arbitral tribunal may order precautionary measures unless otherwise agreed (Article 1433), and the parties may request interim measures from the court even when there is an arbitration agreement (Article 1425).

The seat has two consequences. First, setting aside: with a seat in Mexico, the award may be set aside only on the exhaustive grounds of Article 1457 (incapacity of a party or invalidity of the agreement, lack of proper notice or inability to present one's case, the tribunal exceeding its mandate, irregular composition or procedure, non-arbitrable subject matter, or public policy), within three months of notice of the award (Article 1458). Second, enforcement, which setting aside at the seat may prevent. In Mexico, an award made in any country is recognized as binding and enforced, without the need for exequatur (homologación), upon written application to the court (Articles 1461 and 1471); the grounds for refusing it (Article 1462) are essentially those for setting aside, plus one: that the award has not yet become binding or has been set aside or suspended in the country where it was made. In other countries, the 1958 New York Convention applies, and it limits the grounds for refusing enforcement in a similar way (Article V).

A pathological clause is one whose wording prevents or hinders arbitration. The ICC warns that unclear language causes uncertainty and delay; CANACO recommends completing its model with the number of arbitrators, the place, the language, and the applicable law. Typical defects:

• Naming an institution that does not exist or naming it inaccurately, or mixing two sets of rules.
• Agreeing to arbitration and, in another clause, submitting to the courts without saying which prevails.
• Making arbitration optional (the parties may resort to arbitration) without defining who chooses and when.
• Omitting the seat, or naming a specific person as arbitrator without providing for a replacement.

All disputes arising out of this contract shall be finally settled in accordance with the Arbitration Rules of the Centro de Arbitraje de México (CAM) by one or more arbitrators appointed in accordance with those Rules.

In short: start from the model clause of the chosen institution, fill in its blanks with these five decisions, and draft any additions clearly, without contradicting the rules. A defective clause may be replaced, by mutual agreement, with a separate arbitration agreement (Article 1416, Section I).