The use of an arbitration clause in business contracts

The arbitration clause inserted in a business contract allows contracting parties to submit dispute resolutions arising from the agreement to one or more arbitrators, previously designated by the parties. These will help to resolve the dispute, instead of submitting it to the justice courts. Rather than adding the clause within the contract, parties can also conclude an independent arbitration agreement, even after the dispute arises.

National law in Spain regulates arbitration through the Arbitration Law 60/2003, which substitutes and modernizes the previous Arbitration Law 36/1988. This legislative development was needed to align Spanish arbitration rules with the Model Law on International Arbitration, which harmonises arbitration laws at the international level.

Arbitration court, which has to decide on the matter of dispute, comprise arbitrators selected by the contracting parties. They can appoint one or more arbitrators, as long as they add up to an odd number. According to article 13 of the Arbitration Law 60/2003, only a natural person benefitting from the full exercise of his rights can become an arbitrator.

The chosen arbitrators make decisions called arbitral awards that possess the force of res judicata. Therefore, arbitral awards are directly enforceable, and can only be cancelled according to restrictive hypotheses enumerated by the Arbitration Law 60/2003.

The validity of the arbitration clause

The arbitration clause’s validity is based on several criteria, but it is not a rigid process. It is sufficient, for example, for it to be in written (article 9.3 of the Law 60/2003). It is this lack of strict formalism that allows for great flexibility in the drafting and use of this type of clause.

The arbitration clause validity is based on the free will of the parties to the contract (article 9.1 of the Arbitration Law 60/2003). This free will allow the parties to decide the inclusion of an arbitration clause in the contract and grant them the power to select the arbitrators, recuse them freely, fix the place of the arbitration or choose the language for the arbitral award. Besides, the Supreme Court of Madrid widely interprets the free will of the parties to submitting dispute resolutions to an arbitral court. In their Judgement n°17/2018, judges recognise that the clause by which parties decided to submit any potential dispute to an arbitration court or, as a last resort, to the judicial courts of Madrid, clearly indicates the parties’ will to use arbitration.

There are some circumstances, however, in which the use of arbitration is strictly prohibited, for instance when it concerns illicit materials.

The utility of the arbitration clause

To consider the suitability to insert an arbitration clause to a business contract, the pros and cons have to be balanced.

Advantages for the use of an arbitration clause:

  • The arbitration proceeding is faster than the common judicial proceeding. Article 37.2 of Arbitration Law 60/2003 compels arbitrators to give their arbitral awards within a maximum period of 6 months
  • The arbitration proceeding reduces hostility between the parties and ensures a climate of dialogue, not always present in ordinary judicial proceedings. So arbitration further promotes a good relationship between the parties
  • Arbitrators specially appointed by the parties settle the dispute. In arbitration matters, arbitrators with specific knowledge in the field of the dispute and not civil judges are in charge to judge the disputes
  • The arbitration procedure is characterised by its discretion due to its confidentiality. The confidentiality obligation provided for in article 34 of Law 60/2003 prohibits the parties and the arbitration institutions the disclosure of information subject of arbitration proceedings
  • Finally, the arbitration cost may seem more expensive at first sight considering the necessary remuneration of the arbitrators. However, since the duration of the arbitration proceeding is significantly shorter than that of ordinary proceeding, eventually arbitration may sometimes be more affordable.

However, inserting an arbitration clause to a business contract has also disadvantages:

  • Arbitration is criticized for its lack of transparency and causes mistrust. This inconvenient directly results from the confidential nature of the arbitration proceedings. Part of the legal scholars advocates for the option of making public arbitral awards by unanimous agreement of the parties
  • Another inconvenient of arbitration is the lack of jurisprudence on the subject, particularly useful when disputes arise
  • Arbitrators are also criticized for issuing Solomonic judgements, i.e. decisions in which the arbitrator splits the wrongs between the parties, sometimes compelling one of them to give up to its detriment. Hence the need to carefully choose the arbitrators.

The advantages and disadvantages of incorporating an arbitration clause into a contract require an individual assessment, to correctly determine in advance any potential difficulty.

If you need further information about the arbitration clause in business contracts, please do not hesitate to contact us.

Alexandra Gilles

This article is not considered as legal advice

Business Law

Mariscal & Abogados specializes in providing legal advice and effective business solutions to companies in the drafting, negotiation and analysis of all types of commercial contracts (sale, purchase, loan, supply, etc.). If you have a query, do not hesitate to Contact us.