The arbitration clause in contracts

The arbitration clause is the provision by which the parties to a contract decide that their disputes will not be resolved by the state courts, but by a private arbitral tribunal. In an international context like Switzerland, where many business relationships involve foreign counterparties, it is anything but an accessory tool. Well drafted, it guarantees confidentiality, technical expertise and a decision that is easily enforceable abroad. Badly drafted, it produces years of uncertainty over the competent forum. Let’s look at what it takes for it to hold up.

What an arbitration clause does

With the arbitration clause the parties withdraw the dispute from the ordinary jurisdiction and entrust it to one or more arbitrators, whose decision — the award — has binding effect like a judgment. Switzerland is one of the most widely used arbitration seats in the world, for two reasons: a stable legal framework and its ratification of the 1958 New York Convention, which makes Swiss awards recognisable and enforceable in more than 170 states. This is often the decisive advantage over a state judgment, whose enforcement abroad can be far more complex.

Domestic and international arbitration

Swiss law distinguishes two regimes:

• international arbitration: applies when at least one party, at the time of the agreement, is domiciled or has its seat outside Switzerland. It is governed by Chapter 12 of the Federal Act on Private International Law (PILA);
• domestic arbitration: when all parties are in Switzerland. It is governed by the Code of Civil Procedure (CCP).

The distinction matters, because some rules change on the validity of the agreement, on the grounds for challenging the award and on the powers of the supporting court. Knowing which regime applies is the first step to drafting a coherent clause.

The validity requirements

For the clause to be effective, certain conditions must be met:

• written form or another form that allows its text to be evidenced (including an exchange of emails or other means that make it possible to prove the agreement);
• arbitrability of the dispute: in international matters, any claim of a financial nature is arbitrable. Some matters remain reserved for the state courts;
• capacity of the parties to bind themselves and a clear intention to waive the ordinary courts.

An ambiguous clause — one that refers simultaneously to arbitration and to a state court, or that does not clarify whether arbitration is binding — is the main source of preliminary litigation. Clarity here is worth more than elegance.

The elements to define

A solid arbitration clause always sets out certain essential elements:

• seat of arbitration: it determines the applicable procedural law and the court competent for any challenge. Setting a seat in Switzerland means anchoring the procedure to Swiss law;
• applicable rules: you can opt for arbitration administered by an institution (for example the Swiss Rules) or for ad hoc arbitration;
• number of arbitrators: one or three. A sole arbitrator is faster and cheaper; a panel of three offers greater safeguards in complex disputes;
• language of the proceedings;
• law applicable to the merits of the contract, not to be confused with the law governing the procedure.

Defining these points at the time of signing avoids having to negotiate them once the dispute has already broken out and relations are compromised.

Advantages and limits

The strengths of arbitration are confidentiality (the hearings and the award are not public), the ability to choose arbitrators with specific technical expertise, procedural flexibility and easy international enforcement. The disadvantages, however, must be considered honestly: costs can be high, especially with a panel of three arbitrators, and the scope to challenge the award is very narrow. The award can be contested before the Federal Supreme Court only on exhaustive grounds — such as the irregular composition of the tribunal or a breach of public policy — not for a simple error of assessment on the merits.

This is precisely why arbitration is particularly suited to international contracts of significant value, whereas for smaller relationships the ordinary courts often remain the more proportionate choice.

How we work at SIH ONE

We draft arbitration clauses tailored to the contract and its international dimension, coordinating them with the law applicable to the merits and with the enforcement strategy. We check the most suitable arbitrability, seat and rules, avoiding the ambiguous wordings that turn a fast remedy into preliminary litigation.

Do you want your contracts to provide for a dispute-resolution mechanism that is effective and genuinely enforceable? Discover the services of our tax-legal division and build agreements that hold up.