When is a Party Required to Arbitrate?

Over the past few decades, arbitration agreements have become increasingly common in contracts between corporations, workers and customers. In fact, you’ve likely agreed to one in signing a generic consumer agreement or by checking a terms and conditions box. They are also commonplace within global contexts, such as in international contracts between foreign investors and sovereign nations.

In an arbitration clause, the parties are agreeing to forgo litigation in domestic courts and to instead resolve disputes through arbitration. For example, if two companies enter into a contract for the sale and purchase of goods and the contract contains an agreement to arbitrate disputes, the companies are obligated to resolve any dispute through arbitration. However, before jumping to arbitration, it’s important to carefully read the arbitration agreement between the parties to ensure that the agreement to arbitrate applies to the particular dispute at issue.

Is my particular dispute covered by the arbitration agreement?

The extent of disputes covered by an arbitration clause can vary and depends on the language of an arbitration clause, which can be broad or narrow. For example, the standard model clause developed by the International Chamber of Commerce (ICC) states: that “all disputes arising in connection with the present contract shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.” Arbitration clauses that use broad language like the ICC model clause are likely to cover any dispute arising out of a contract. In contrast, a narrow arbitration clause will specify which particular dispute(s) it covers whether it be, for example, only technical, legal or performance issues.

Parties should take care when drafting an arbitration clause to ensure it is clear and leaves no ambiguity as to the scope of disputes covered. However, even with careful drafting, it is common for one party to contend that the particular dispute does not fall within the scope of the arbitration clause. Such contentions can delay the arbitration proceedings and may even continue to delay post-award enforcement proceedings if the party continues to maintain that the dispute was not within the scope of the arbitration clause.

Recent enforcement actions against India and Equatorial Guinea in the federal courts in Washington, DC provide examples of the challenges parties can face when there is disagreement over the scope of an arbitration clause. In the enforcement action against India, India is challenging whether the petitioner – a German telecommunications company – is an “investor” with an “investment” as defined in the relevant treaty. In the action against Equatorial Guinea, the state is arguing that it only agreed to arbitrate certain disputes that arise from, and as a result of, prior litigation in its domestic court system. In both cases, the parties’ disagreement over the scope of the relevant arbitration agreement has continued long past the initial arbitration and into post-award enforcement proceedings.

What if my contract is found to be invalid?

Under the law of many countries (including the United States), arbitration clauses are “separable” from the original contract. This means that even if the larger agreement is invalidated, the arbitration clause in the contract may still be enforceable. In such situations, it is important to consult an attorney to determine whether the arbitration clause in a contract may still be enforced and, if so, the scope of that arbitration clause.

How can a party compel arbitration?

A motion to compel arbitration is simply a legal request for the court to enforce an arbitration clause and require both parties to resolve the dispute through arbitration.

If the party chooses to proceed with compelling arbitration in a U.S. court, the motion must contain certain allegations. These allegations include: 1) that a written agreement to arbitrate exists, 2) that one of the parties refuses to arbitrate, and 3) that there has been a prior request to arbitrate. Additionally, if the opposing party had filed a parallel lawsuit despite the agreement to arbitrate, a motion to stay those judicial proceedings can be filed as well (meaning the judicial proceedings would be temporarily suspended). In order to grant a motion to compel, the court must determine whether the language of the arbitration clause covers the scope of the dispute at hand.

What happens if a party continues to resist arbitration after a motion to compel is granted?

After a motion to compel is granted by a court, the parties are required to proceed with arbitration. If the resisting party continues to refuse to engage in the arbitral process, the arbitral proceedings can continue without that party.

The rules of most international arbitral institutions include mechanisms which address how to proceed in a party’s absence at various stages of proceedings. For example, Article 29 of the ICDR’s International Dispute Resolution Procedures addresses default, stating that “[i]f a party fails to submit an Answer” or “fails to appear at a hearing without showing sufficient cause for such failure, the tribunal may proceed [with the arbitration].”

Most arbitration rules do not consider a party’s absence or refusal to participate as a de facto admission of the other party’s claims. With this in mind, tribunals will implement certain practices to ensure the fairness of proceedings in which only one side is participating. Ensuring fair proceedings and a full opportunity for a defaulting party to participate are ways an arbitral tribunal can avoid jeopardizing the enforceability of the final award.

Conclusion

If you are facing a stubborn counterparty who refuses to engage in arbitration as provided for in an arbitration agreement, a motion to compel may be a useful tool to get parties on the same page in arbitration proceedings, but it may not be needed. It may be more efficient to urge the arbitrators to proceed without the recalcitrant party.