The Arbitration Clause in Contracts: What Factors to Consider and How to Draft It Correctly

Arbitration has gained ground as an alternative method of dispute resolution, especially in the commercial and contractual fields, so including an arbitration clause in a contract can be the difference between an agile and efficient solution or years of costly litigation before the courts.

Whether we are talking about ad hoc arbitration or institutional arbitration, understanding how this tool works and how to draft it properly is essential to protect our interests.

Let’s take a detailed look at what an arbitration clause is, why it should be included in contracts, what it must contain, and how to draft it properly, using practical examples and references to the ICC Rules, one of the most recognised internationally.

1. What is an arbitration clause?

An arbitration clause, also known as an arbitration agreement, is a provision included in a contract that establishes that any dispute arising between the parties shall be resolved through arbitration, instead of resorting to ordinary courts.

Unlike other methods such as mediation, the decision issued in an arbitration proceeding has binding and enforceable effect on the parties, just as a judicial ruling does.

Thus, this clause defines the parties’ prior agreement to submit to arbitration in the event of a dispute, which means that the parties agree not to bring such disputes before the ordinary courts, except in the legally established cases such as judicial assistance, interim measures, or the challenge of the arbitral award.

2. Types of arbitration: Ad hoc vs. Institutional

There are two main types of arbitration: ad hoc arbitration and institutional arbitration. Both options have advantages and disadvantages, but the important thing is that the arbitration clause clearly specifies which route the parties have chosen.

2.1 Ad hoc arbitration

This type of arbitration is not administered by any specific institution. The parties are responsible for organising the entire procedure, from selecting the arbitrators to establishing the procedural rules.

This form offers greater flexibility and can be more economical, but it also entails certain risks, especially if every procedural aspect has not been properly addressed in the arbitration clause. It is essential for the parties to include supplementary procedural rules (for example, the UNCITRAL Rules), as the absence of an organising entity may lead to delays or disputes on how to proceed if procedural disagreements arise.

2.2 Institutional arbitration

This is managed by a specialised entity, such as the ICC, the Madrid Court of Arbitration, or the International Centre for Settlement of Investment Disputes (ICSID). These institutions have pre-established rules and administrative structures that support the procedure.

Although it may involve slightly higher costs, it offers a guarantee of order, efficiency and professionalism. Furthermore, the institutions act as a neutral support, helping to resolve procedural conflicts.

3. Why include it in my contract?

The main reason to include an arbitration clause in a contract is efficiency. Arbitration can be faster than ordinary court proceedings, and it offers confidentiality—something highly valued in commercial disputes.

Another advantage is specialisation: arbitrators are often experts in the subject matter of the contract, which allows for more in-depth technical analysis in a specific sector than a generalist judge might provide.

Moreover, if the contract has an international dimension, an international arbitration clause helps avoid jurisdictional conflicts between courts of different countries, offering greater legal certainty.

The arbitral award, in turn, is enforceable in most countries thanks to the 1958 New York Convention, which facilitates its enforcement.

4. What should an arbitration clause contain?

A model or well-drafted arbitration clause should contain at least the following elements:

• Clear agreement of the parties to submit to arbitration.
• Type of arbitration: institutional or ad hoc.
• Chosen arbitral institution, if applicable.
• Seat of arbitration, that is, the place where the award will be deemed legally issued and whose procedural law shall govern the procedure (lex arbitri).
• Language of the arbitration.
• Number of arbitrators and method of appointment.
• Procedural rules applicable to the arbitration (especially in ad hoc arbitration).
• Law applicable to the substance of the dispute, either in the arbitration clause or in the main contract. If the lex arbitri differs from the substantive law, it is advisable to expressly establish the law applicable to the arbitration agreement itself, in accordance with the “principle of separability.”

It is important to avoid ambiguities, because a poorly drafted clause can become ineffective and provoke additional disputes. Therefore, each element must be clearly defined.

5. How to draft an arbitration clause?

5.1 Common errors when drafting an arbitration clause

One of the main errors when drafting an arbitration clause is being vague or overly generic. For example, phrases such as “the parties shall submit to arbitration” without defining the scope of the clause may create uncertainty regarding the procedure and, consequently, disputes over how the arbitration should be carried out or what matters are subject to arbitration.

Another common error is failing to designate the seat of arbitration, since the seat determines not only the physical location but, more importantly, the procedural law applicable to the arbitration and the jurisdiction that may review the validity of the final award. Likewise, the language of the arbitration is often omitted, which is crucial, especially in international contracts, to avoid misunderstandings and unforeseen translation costs.

Similarly, failing to define the number of arbitrators or the method of appointment is also a risky omission. For example, in complex disputes, it may be necessary to have a tribunal of three arbitrators instead of a sole arbitrator, and this should be clearly stated.

5.2 When is an arbitration clause invalid?

An arbitration clause may be declared invalid for various reasons. The most obvious is if it breaches public policy provisions or contradicts mandatory rules of the country whose law governs the contract.

It may also be invalid if it lacks essential elements such as the clear consent of the parties, or if the subject matter of the dispute is not arbitrable (e.g., criminal or family matters in many countries).

In addition, a poorly drafted or contradictory clause may generate such a degree of ambiguity that a court could declare it unenforceable.

Another aspect to consider is the compatibility between the arbitration clause and the main contract. However, pursuant to the “principle of separability” recognised in Article 22.1 of the Spanish Arbitration Act, the arbitration clause may survive even if the main contract is declared null and void, unless such nullity also affects the clause itself.

6. Conclusion

The drafting of an arbitration clause in a contract should not be taken lightly, as it is a strategic decision that can significantly impact how future disputes are resolved. If a party wishes to ensure legal certainty, resolve disputes more quickly, and maintain confidentiality and control over the process, including an arbitration clause is essential. It is therefore advisable to seek sound legal advice on arbitration matters to safeguard the interests of a project or contract—especially if international in scope—both now and in the future.