PATHOLOGICAL CLAUSES IN ARBITRATION: A COMPREHENSIVE ANALYSIS

Gopika Kalidas, a distinguished graduate from Alliance Law School, Alliance University, Bangalore. Read More

---

Introduction

The most important part of an arbitration agreement is typically embedded in a contract as an arbitration clause. However, poorly drafted arbitration clauses can undermine the arbitration process which can lead to jurisdictional disputes, procedural delays, increased costs and unenforceable awards. These clauses are called “pathological clauses”. This article will provide an exploration of pathological clauses along with necessary implications in the arbitration agreements.

Introduction to Pathological Clauses

The term “pathological clauses” coined by Frederic Eisemann in 1974, refers to arbitration agreements that fail to fulfil their essential functions due to drafting defects.  An effective arbitration clause ensures a clear, binding and enforceable process for dispute resolution. According to Eisemann, an arbitration clause must achieve four objectives:

• Produce mandatory consequences, compelling parties to arbitrate rather the litigate.
• Exclude state court intervention in resolving disputes before an arbitral award, except for supportive measure like interim relief.
• Empower arbitrators to adjudicate disputes with binding effect.
• Establish an efficient procedure leading to an enforceable award.

A clause is deemed pathological when it contains defects that hider these objectives. Pathological clauses can arise from inexperience, lack of legal expertise or drafting issues especially in complex international contracts. The consequences of such clauses range from minor procedural disputes to the complete invalidation of the arbitration agreement, frustrating the parties intent to resolve disputes efficiently.

Types of Pathological Clauses

Pathological clauses manifest in various forms, each with distinct characteristics and implications. The most common types are as follows:

1. Ambiguity and Vague Language

   Ambiguous clauses lack clarity on essential elements, such as seat of arbitration, arbitral institution, governing rules or scope of disputes covered. Vague languages such as “disputes may be resolved by arbitration” fails to establish a mandatory obligation to arbitrate. In all cases the clauses had be clear in mentioning the arbitral institution, number of arbitrators and procedural rules which if not could create uncertainty about how arbitration should proceed.

   Ambiguity can lead to preliminary litigation to clarify the clauses meaning, delaying dispute resolution and increasing costs. Parties may disagree on whether arbitration is mandatory, which institution administers it or where it is legally seated. In Fiona Trust & Holding Corp v. Privalov [1], the English Court of Appeal upheld a vague clause referring to “arbitration in London” by inferring the parties intent arbitrate, but the lack of detail judicial intervention to confirm the procedure.

2. Inconsistent or Contradictory Terms

   Contradictory clauses combine arbitration with other dispute resolution mechanisms, such as court jurisdiction, creating confusion about the parties’ intent. For instance, a clause mandating arbitration while granting exclusive jurisdiction to courts is inherently conflicting. Contradictions may trigger jurisdictional disputes, with one party seeking arbitration and the other pursuing litigation. In Paul Smith v. H&S International Holding Inc. [2] the English Court reconciled a clause combining ICC arbitration with “exclusive jurisdiction” of English Courts by interpreting the latter as referring to the governing law of the arbitration agreement, preserving the arbitration clause.

3. Reference to Non-Existent Institutions or Rules

   Clauses that refer to non-existent arbitral institutions or mismatched rules can render the arbitration unworkable. Such defects can halt proceedings as parties dispute the applicable institution or rules. Courts may substitute a valid institution, but this requires judicial intervention, increasing delays and costs. In Lucky Goldstar v. Ng Moo Kee Engineering [3], a Hong Kong court salvaged a clause referring to a non-existent institution by substituting a valid one, but the process delayed the arbitration significantly.

4. Optional or Non-Binding Arbitration

   Clauses using permissive language or requiring further agreement may not constitute a binding arbitration agreement. Non-binding clauses risk being unenforceable, as arbitration requires a clear and unequivocal agreement. Courts may interpret permissive language as mandatory in context, but this is not guaranteed. In Kruppa v. Benedetti [4] an English Court deemed a clause stating parties would “endeavour to resolve disputes through Swiss arbitration” non-binding due to its discretionary language, invalidating the arbitration agreement.

5. Incomplete and Missing Details

   Clauses that omit critical details, such as the method for appointing arbitrators, number of arbitrators, seat of arbitration, or governing law, can complicate the arbitration process. Incomplete clauses may lead to disputes over procedural interpretation, requiring court intervention to fill gaps. While some jurisdictions provide default rules, this can still cause delays. In Sulamerica Cia Nacional de Seguros SA v. Enesa Engenharia SA [5] an English Court addressed a clause lacking a specified seat by inferring the seat based on the contract’s governing law, but the omission sparked litigation.

6. Violation of Mandatory Legal Requirements

Clauses that conflict with mandatory laws or public policy, such as requiring arbitration for non-arbitrable disputes (e.g., criminal matters, certain family law issues, or statutory claims), may be unenforceable. Such clauses may be struck down entirely or partially, depending on the jurisdiction and the nature of the violation. In Fulham Football Club Ltd v. Tigana [6], an English court invalidated a clause attempting to arbitrate a non-arbitrable statutory claim, highlighting the limits of arbitration agreements.

Judicial and Arbitral Approaches to Pathological Clauses

Despite the challenges posed by pathological clauses, most modern arbitration laws and arbitral institutions adopt a pragmatic a pro-arbitration approach, striving to uphold the parties intention to arbitration. This reflects a policy preference for commercial certainty and the enforcement of contractual agreements:

The Pro Arbitration Stance and Liberal Interpretation: Many jurisdictions and courts operate under the principle of ut res magis valeat quam pereat meaning “it is better for a thing to have effect than to be void”. This means they will generally interpret ambiguous or incomplete arbitration clauses in a way that gives them effect, rather than rendering them invalid. The focus shifts to discerning the parties underlying intention to arbitrate, even if imperfectly expressed.

Filling in the Gaps: One of the primary cures for incomplete pathological clauses is the application of the default provisions found in the rules of the chosen arbitral institution. For example, if the clause specifies “ICC Arbitration” but is silent on the number of arbitrators, the ICC Rules will provide a default mechanism. Similarly, the lex arbitri (the law of the seat of arbitration) often contains default provisions for aspects like arbitrator appointment if the parties or institution fail to act.

Severability: If a pathological clause contains one or more defective parts that can be separated from the core agreement to arbitrate, courts and tribunals may sever the problematic parts and uphold the remainder of the clause. This aims to preserve the parties’ fundamental agreement while discarding only the unworkable elements.

Competence-Competence Principle: A cornerstone of international arbitration, the competence-competence principle or Kompetenz-Kompetenz states that an arbitral tribunal has the power to rule on its own jurisdiction, including challenges to the existence or validity of the arbitration agreement. This means that initial arguments about a pathological clause are often heard and decided by the arbitrators themselves, even before any court intervention. While their decision can later be challenged in national courts, this principle aims to prevent parties from immediately resorting to courts to frustrate the arbitration.

Limits to Interpretation: Despite the pro-arbitration bias, there are limits. If the pathology is so severe that it demonstrates no clear and unequivocal intention to arbitrate, or if it creates confusion that cannot be remedied by reasonable interpretation or default rules, courts may refuse to enforce the arbitration agreement. This often occurs with truly contradictory clauses or those that are mere “agreements to agree” in the future. The fundamental requirement of mutual consent to arbitrate must always be present.

Causes of Pathological Clauses

Pathological clauses often result from a combination of factors, including:

• Lack of Legal Expertise: Parties without access to experienced counsel may draft clauses without understanding the nuances of arbitration law, leading to ambiguities or omissions.
• Hasty Drafting: In time-sensitive commercial negotiations, parties may prioritize substantive terms over dispute resolution clauses, resulting in poorly crafted provisions.
• Cultural and Linguistic Differences: In international contracts, differences in legal traditions or language proficiency can lead to misinterpretations or inconsistent terms.
• Overreliance on Boilerplate Clauses: Using generic or outdated templates without tailoring them to the specific contract or jurisdiction can introduce defects.
• Negotiation Compromises: Parties may dilute the clarity of arbitration clauses to reach a compromise, introducing contradictory or optional language.
• Unfamiliarity with Arbitral Institutions: Referencing non-existent or inappropriate institutions reflects a lack of familiarity with the arbitration ecosystem.

Implications of Pathological Clauses

Pathological clauses can have far-reaching consequences for the arbitration process, including:

• Jurisdictional Disputes: Ambiguous or contradictory clauses may lead to challenges over the arbitrator’s authority or the validity of the arbitration agreement, requiring court intervention.
• Procedural Delays: Disputes over the clause’s interpretation such as the seat, institution, or rules can delay the constitution of the arbitral tribunal and the commencement of proceedings.
• Increased Costs: Preliminary litigation or negotiations to resolve defects can significantly increase legal and administrative costs, undermining arbitration’s cost-effectiveness.
• Unenforceability: In extreme cases, a pathological clause may be declared void, forcing parties to litigate in courts or renegotiate their dispute resolution mechanism.
• Enforcement Challenges: Awards issued under defective clauses may face challenges under the New York Convention, particularly if the arbitration agreement is deemed invalid under the applicable law (Article V(1)(a)).
• Reputational and Commercial Harm: Delays and disputes arising from pathological clauses can strain business relationships and harm the parties’ commercial interests.

A 2018 study by Queen Mary University of London found that 20% of respondent in internation arbitration cases encountered issues with defective arbitration clauses, highlighting their practical impact.

Comparative Perspectives

1) India – Indian courts, under the Arbitration and Conciliation Act 1996 (based on the UNCITRAL Model Law), have historically been interventionist but have become more pro-arbitration following amendments in 2015 and 2019. They strive to uphold defective clauses if the intent to arbitrate is clear. In Jagdish Chander v. Ramesh Chander [7], the Supreme Court of India invalidated a clause requiring further consent for arbitration, emphasizing the need for a binding agreement. The approach will be different being that the Indian courts are less consistent than English courts, with some judges adopting a stricter approach to defective clauses.

2) Singapore– Singapore, a global arbitration hub, follows a pro-arbitration approach similar to English law, interpreting defective clauses to uphold the parties intent. The Singapore International Arbitration Centre (SIAC) often assists in curing defects. In Insigma Technology Co Ltd v. Alstom Technology Ltd [8], the Singapore Court of Appeal upheld a clause referring to “SIAC administering ICC rules” by allowing SIAC to administer the arbitration under its own rules. Singapore’s approach is nearly identical to England’s, with a slight preference for institutional intervention over judicial correction.

3) United States– U.S. courts, under the Federal Arbitration Act (FAA), are pro-arbitration and interpret defective clauses liberally to uphold the parties intent. The doctrine of “severability” allows courts to remove invalid terms while preserving the arbitration agreement. In AT&T Technologies v. Communications Workers of America [9], the U.S. Supreme Court upheld a vague clause by inferring the intent to arbitrate, emphasizing the FAA’s pro-arbitration policy. U.S. courts are lenient but place greater emphasis on the parties conduct to infer intent, whereas English courts focus on contractual interpretation.

Strategies to Avoid Pathological Clauses

To prevent the issues associated with pathological clauses, parties should draft arbitration agreements with precision and foresight. Below are best practices:

• Use Mandatory Language: Clearly state that disputes “shall” or “must” be resolved by arbitration to avoid ambiguity.
• Specify Key Details: The clause has to be clear on Seat of Arbitration, Arbitral Institution, Governing Rules, Number of Arbitrators, Appointment Mechanism and Governing Law.
• Avoid Contradictory Terms: Ensure the clause does not conflict with other dispute resolution provisions in the contract.
• Incorporate Model Clauses: Use model arbitration clauses provided by institutions like the ICC, LCIA, or UNCITRAL, which are designed to be clear and enforceable.
• Consult Legal Experts: Engage experienced counsel to review the clause, ensuring compliance with the governing law and the jurisdiction’s arbitration framework.
• Tailor Clauses to Context: Customize the clause to the contract’s nature, jurisdiction, and parties needs, avoiding generic templates.
• Conduct Due Diligence: Verify the existence and reputation of arbitral institutions and rules referenced in the clause.

Conclusion

Pathological clauses in arbitration represent a significant challenge to the efficacy of dispute resolution, arising from drafting errors such as ambiguity, contradiction, or omission. These defects can lead to jurisdictional disputes, procedural delays, increased costs, and unenforceable awards, undermining the advantages of arbitration. English courts, with their pro-arbitration stance under the Arbitration Act 1996, strive to uphold defective clauses by interpreting them to reflect the parties’ intent, but severe defects such as lack of binding intent or irreconcilable contradictions can result in invalidation. Comparative perspectives from jurisdictions like the India, Singapore and the United States reveal varying degrees of leniency, with pro-arbitration jurisdictions generally favouring interpretation over invalidation.

To avoid pathological clauses, parties must draft arbitration agreements with precision, using mandatory language, specifying key details, and incorporating model clauses from reputable institutions. Legal expertise, due diligence, and tailored drafting are essential to ensure clarity and enforceability. As arbitration continues to grow as a preferred dispute resolution mechanism, addressing the issue of pathological clauses remains critical to preserving its efficiency, reliability, and global appeal.

BIBLIOGRAPHY

• Alstom Technology Ltd. v. Insigma Technology Co Ltd, https://jusmundi.com/fr/document/decision/en-alstom-technology-ltd-v-insigma-technology-co-ltd-judgment-of-the-high-court-of-singapore-2008-sghc-134-thursday-14th-august-2008.
• AT&T Technologies, Inc. v. CWA, https://supreme.justia.com/cases/federal/us/475/643/.
• Fiona Trust v Privalov in the High Court, https://www.hsfkramer.com/notes/arbitration/2015-03/fiona-trust-v-privalov-in-the-high-court.
• Fulham Football Club (1987) Ltd v Tigana, https://vlex.co.uk/vid/fulham-football-club-1987-793930989.
• Interpretation of Pathological Clauses by UAE Courts, https://arbitrationblog.kluwerarbitration.com/2023/06/08/interpretation-of-pathological-clauses-by-uae-courts/.
• Interpretation of pathological clauses: a cautionary tale?, http://arbitrationblog.practicallaw.com/interpretation-of-pathological-clauses-a-cautionary-tale/
• Interpreting Pathological Arbitration Clauses, https://www.bwlegalworld.com/article/interpreting-pathological-arbitration-clauses-470609.
• Introduction to the Pathological Clause of Arbitration: A Prescription to Avoid the Causing Factors, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4968622.
• Kruppa v Benedetti & Anr, https://www.fenwickelliott.com/research-insight/newsletters/dispatch/archive/kruppa-benedetti.
• Lucky-Goldstar International (H.K.) Ltd v. Ng Moo Kee Engineering Ltd, https://www.quimbee.com/cases/lucky-goldstar-international-h-k-ltd-v-ng-moo-kee-engineering-ltd.
• Pathological Arbitration Clauses, https://singaporeinternationalarbitration.wordpress.com/2013/03/08/pathological-arbitration-clauses/.
• Pathological Arbitration Clauses: Characteristics and Solutions, https://www.linkedin.com/pulse/pathological-arbitration-clauses-characteristics-solutions-nour-moez/.
• Pathological Clauses in Arbitration: A Comparative Study of UAE, Egypt, and Jordan, https://mandcolegal.com/pathological-clauses-arbitration-uae-egypt-jordan/.
• Pathological clauses in international commercial arbitration, https://archive.interconf.center/index.php/2709-4685/article/view/4086.
• Paul Smith Ltd. v. H & S International Holding Inc., https://www.i-law.com/ilaw/doc/view.htm?id=149793.
• Ramesh Chander v. Jagdish Chander, https://www.casemine.com/judgement/in/56090b0be4b0149711173abf.
• Sulamérica Cia. Nacional De Seguros and others v. Enesa Engenharia and others, https://www.trans-lex.org/311350/_/sulamerica-cia-nacional-de-seguros-sa-v-enesa-engenharia-sa-%5B2012%5D-ewca-civ-638/.
• The Cautionary Tale of Pathological Clauses, https://www.mondaq.com/india/arbitration-dispute-resolution/1197128/the-cautionary-tale-of-pathological-clauses.
• The Dream of a World Free of Pathological Clauses, https://www.globalarbitrationnews.com/2020/03/30/the-dream-of-a-world-free-of-pathological-clauses/.

[1] Fiona Trust & Holding Corp v Privalov  [2007] UKHL 40.

[2] Paul Smith v. H&S International Holding Inc.  [1991] 2 Lloyd’s Rep 127.

[3] Lucky-Goldstar International (H.K.) Ltd v. Ng Moo Kee Engineering Ltd [1994] Arb. & Disp. Resol. L.J. 49 (1994).

[4] Kruppa v Benedetti & Anr  [2014] EWHC 1887 (Comm).

[5] Sulamerica Cia Nacional de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638.

[6] Fulham Football Club (1987) Ltd v Tigana [2005] EWCA Civ 895.

[7] Jagdish Chander v. Ramesh Chander (2007) 5 SCC 719.

[8] Alstom Technology Ltd. v. Insigma Technology Co Ltd [2009] SGCA 24.

[9] AT&T Technologies, Inc. v. CWA  475 U.S. 643 (1986).