Arbitration clauses constitute one of the salient dispute resolution clauses in legal agreements. One of the well-known essences of having such clauses in agreements —apart from amicable resolution of grievances—is to foster business relationships without the need of proceeding to the regular court system, thereby circumventing uncertainties as to time.

This article focuses on the importance of properly drafted arbitration clauses and how best to generally avoid early litigation costs arising from improperly drafted arbitration clauses. Various Nigerian court decisions emanating from contentions of refusing parties to arbitration were reviewed. The court decisions demonstrated how refusing parties sought to use improperly drafted arbitration clauses as a legal reason to avoid proceeding with arbitral proceedings or to set aside unfavourable arbitral awards under the guise that the clauses were ill-drafted.

The litmus test adopted by the courts in determining whether an arbitration clause was improperly drafted was to determine whether there is any intent shown by the parties to resort to arbitration in the first instance once a dispute is declared.  In those decisions, once the court confirms an existence of such intent, the court always compels arbitration. Interestingly, some of the Nigerian courts relied on a plethora of U.S. court decisions to order parties to arbitrate. This study frowns at the position of the refusing parties in opting for court proceedings rather than resorting to arbitration as agreed.

Introduction

The success or otherwise of an effectual commencement of an arbitration proceeding largely depends on the arbitration clause or the agreement. If it was poorly drafted, it will create ambiguity on how the arbitration proceedings would be commenced, ranging from request for arbitration, the appointment of arbitrators, and the place of arbitration and exchange of pleadings for the parties. Conversely, if the clauses were well thought after and properly drafted, the parties to the dispute would have no difficulties setting the proceedings in motion. 

Therefore, it is highly recommended that parties should take time to effectively negotiate arbitration clauses in their agreements precisely the same way other fundamental provisions in their contracts are negotiated. This is to avoid exposing the parties to early significant time and costs at the preliminary stage of disputes or to enforce an arbitral award.

Conceivably, once a dispute crystallises, the opportunity to discuss the logistics surrounding the arbitral process freezes and the parties are concerned with how best to protect their various rights and shift obligations in respect of the terms of the agreement. Parties are then confronted with the tussle over preliminary procedural issues like the appointment of Arbitrator (s), the seat of arbitration, and forum non-conveniens. This is because the seat of arbitration is of fundamental importance in arbitral proceedings since the Court of the seat of arbitration is the primary jurisdiction where the award is likely to be challenged by an aggrieved party. The concepts mentioned above are, amongst others, some of the basic background principles that guide the interpretation and enforcement of awards, and for that reason, the arbitration clauses are of paramount importance.

It will be inchoate to discuss or understand the importance of well-drafted arbitration clauses without reviewing vital considerations in drafting arbitration clauses. Therefore, this memorandum will examine the key considerations in drafting arbitration clauses and the importance of well-drafted Arbitration clauses with the relevant cases involving Nigerian parties or entities where arbitration clauses may have been adjudged as pathological but enforced by the Courts.  

Basic Requirements of Arbitration Clauses in Nigeria

The principal law regulating domestic arbitral proceedings in Nigeria is the Arbitration and Conciliation Act.[1] ‘The Act”. It is a federal statute. It is substantially a mirror reflection of UNCITRAL[2] model law.

The Act recommends the prerequisites for a valid and enforceable arbitration clause. The various requirements as circumscribed under the Act for enforceable arbitration clauses are as follows: First, the arbitration agreement must be written[3]; verbal agreements are not binding. A standalone arbitration agreement or an arbitration clause in a contract can make up a written arbitration agreement. Second, arbitrability is required for the types of disputes involved.[4]. For example, parties cannot arbitrate tax disputes.[5]; and any allegation of fraud does not admit of settlement by arbitration. This is because these issues are a matter of public concern, and it is contrary to public policy to compromise such disputes.[6] Third, even though it is not a requirement of the Act, parties often stipulate that a specific action or steps must be taken before arbitration, like negotiation or mediation talks by typical corporate representatives of the parties. However, there is a split amongst Nigerian scholars on whether this is a condition precedent before further steps could be taken. Therefore, it is unclear whether the dispute resolution clause is only desired before the arbitration or essential to start the process. Fourth, it must show that parties are within their contractual legal capacity to arbitrate in the arbitration agreement. For example, an infant or a party less than 18 years does not have the legal capacity to contract. Furthermore, an unregistered entity cannot contract or corporate body in liquidation, or an insane person cannot contract, and for that reason, the parties cannot arbitrate.

Key considerations in drafting Arbitration Clauses

In drafting arbitration clauses, it is relevant to note that there is no universally applicable model or all-purpose arbitration clause. It is highly recommended that each arbitration clause must be circumspectly adapted to the contract's circumstances and the parties' needs. Regrettably, arbitration clauses are frequently neglected or one of the last contractual elements to be discussed; the clauses are sometimes included at the last minute, with the parties relying solely on form clauses or precedents by "copying and pasting." By practical experience, it is observed that failure to customize the arbitration clause to the unique contract's requirements, and by the desires of the parties, it can result in repercussions like a waste of significant time and resources on the procedure for the appointment of the arbitrators[7] and scope of dispute to be subject to arbitration.

Therefore, the wordings may, of course, directly or by implication limit what would otherwise be the clause's full scope or, conversely, extend it even further beyond the scope of parties’ expectations and what the parties intended.[8] In some salient situations, where there is a dispute, much to the consternation of the parties and lawyers, the parties' representatives would raise eyebrows that the parties never subjectively intended the contents of the arbitration clause or agreement.

The key considerations of well-drafted arbitration clauses in comparative analysis of the various reported Nigerian cases or cases involving Nigerian parties are discussed hereunder:

Operative words must be clear, "Shall" and not "May."

It is highly advised that in reducing in writing the parties’ intention to proceed to arbitration, the operative word to be used on what parties should do once a dispute arises is "shall" and not "may." This is to avoid contentious objections in seeking a court interpretation on whether it is mandatory to proceed to arbitration or not by using the word "may."

It has been observed that several refusing parties who do not wish to proceed to arbitration once a dispute is declared had contended before Courts that by the use of the word “may," it is discretionary and optional for parties to proceed to arbitration. The case of Travelport Global Distribution Systems B.V. v. Bellview Airlines Ltd[9] is very illustrative. In the distribution agreement signed between Travelport, a Dutch corporation, and Belview, a Nigerian company, parties agreed their dispute "[m]ay be submitted to arbitration in the United States under UNCITRAL Arbitration rules in force at the date of reference." However, when the dispute crystallised, Bellview filed a lawsuit at the Nigerian Federal High Court and contended that the arbitration clause was ineffective, and it was not mandatory since the word used was "may" and not “shall." Bellview concluded that the use of the permissive phrase "may" is discretionary, and on that ground, the arbitration agreement was invalid. The Court held that the mere fact that parties had arbitration clause in their agreement and also used the word “may” showed clear intent of the parties to arbitrate and therefore, compelled parties to arbitrate.

Similarly, in Sino-Afric Agriculture & Ind Company Ltd & Ors v. Ministry of Finance Incorporation & Anor.[10], parties agreed that any “[d]ispute, difference, or question, may be referred to arbitration by either party under the provision of the Arbitration and Conciliation Law (Cap. 19) Laws of the Federation 1990.” Thereafter, a dispute arose, and the Ministry initiated an action in Court and contended that the use of the word "may" in the agreement indicates that parties have the discretion to arbitrate or proceed to Court. Sino-Afric filed an application seeking a stay pending arbitration. The trial Court dismissed the Sino-Afric's application for stay and assumed jurisdiction. It held that because the word used was "may," proceeding to arbitration was optional. On appeal, the Nigerian Court of Appeal set aside the trial Court’s decision and relied on decisions of the U.S. Court[11] to interpret the word "may" as being mandatory. Hence, the application for stay of proceedings pending Arbitration was granted.

It has been recognized that by decided cases, the typical line of reasoning that the word “may” as used in the agreement is discretionary is no longer the trend in the context of arbitration provisions. Nevertheless, it is to be noted that despite the attitude of the Nigerian appellate Courts in this regard, recalcitrant parties still find such contentions as a basis to delay the commencement of arbitral proceedings under the guise that the operative word "may" is discretionary and not mandatory.

Appointing Authority must be defined and should be in existence

This is also an essential consideration for parties to ensure that appointing authority for Arbitrators is appropriately stated, and it was in existence when the agreement was made. In some situations, the name of the appointing authority may not be stated correctly. It could be misspelled, or nomenclature is different from what they are called. This was the same line of argument made in the Travelport[12] case. In that case, one of the contentions of Bellview was that since the appointing authority "United States Council of Arbitration" is a non-existent institution, the arbitration clause is inoperable and invalid. Hence, parties should ventilate their grievance in a regular Court. Interestingly, the U.S. Court, in jettisoning the Bellview’s line of argument, held that whether or not the appointing authority "United States Council of Arbitration" is a non-existent institution, the UNCITRAL rule agreed to by the parties prescribed on how the arbitrators should be appointed.

In Mr. Charles Mekwunye v. Mr. Christian Imoukhuede [13], the parties’ tenancy agreement stated that “[a]ny conflict and disagreement arising out of these presents shall be referred to a Sole Arbitrator that shall be appointed by the President of the Chartered Institute of Arbitrators, London, Nigerian Chapter.” Mr. Imoukhuede contended that the clause referred to a non-existent body by using the word "President" instead of “Chairman” and argued that the sole Arbitrator's appointment was invalid. The High Court of Lagos State affirmed the arbitral award as valid and subsisting. However, the award was set aside on appeal by the Nigerian Court of Appeal, Lagos, based on the Mr. Imoukhuede’s contention. On appeal to the Nigerian Supreme Court, the apex Court affirmed the decision of the trial Court reinstating the arbitral award and upturned the decision of the Court of Appeal. The Nigerian Supreme Court held that the difference between “Chairman and President” is a matter of title, and it is the person in charge of the Arbitral institution in Nigeria that the parties intended to designate as their appointing authority. Therefore, the Arbitrator's appointment was valid because despite the error in nomenclature "President or Chairman," there was nothing before the Court to suggest that the Respondent was misled or that he was in doubt as to who the appointing authority was.

Appointment procedure must be spelled out in the Arbitration Clause and adhered to strictly

This is typically necessary to avoid delays in Arbitrators' appointments and allow parties to exercise their right in choosing who should preside and determine their dispute as the cornerstone of arbitration remains consent. It is pertinent to state that if the Arbitrators are not appointed under the procedure or rule as agreed to by the parties, it may also constitute a valid legal basis for setting aside an award.[14]

In Celtel Nigeria BV V. Econet Wireless Limited & Ors [15], the parties agreed in their shareholders’ agreement that the Arbitrators to their dispute “[s]hall be appointed by the Chief Judge of the Federal High Court of Nigeria.” Relying on the above provision, the 1st Respondent wrote to the then Chief Judge of the Federal High Court (Ukeje, CJ) to appoint arbitrators. Ukeje, C.J., declined to make the appointment. The 1st Respondent then commenced an action at the High Court of Lagos State seeking a selection of Arbitrators. Before the Court could make the appointment, the 1st Respondent re-applied to the Chief Judge of the Federal High Court (Mustapha, C.J.), who had replaced Ukeje, C.J., in office to constitute an arbitral tribunal to determine the dispute. The new Chief Judge of the Federal High Court (Mustapha, C.J.) acceded to the request and appointed three arbitrators to arbitrate the dispute. Some of the Respondents at the arbitration, including the Appellant, objected to the mode of appointment of the arbitrators by Mustapha, C.J. The Arbitrators heard and dismissed the objections. The arbitral proceedings then proceeded to finality.

Thereafter, the Appellant commenced an action seeking for setting aside of the arbitral award which was predicated, amongst others, that the written refusal of Ukeje C.J., to appoint arbitrators under the Shareholders Agreement foreclosed re-application to Mustapha C.J., as the refusal by Ukeje, C.J., to make the appointment had exhausted the arbitration clause on the appointment of arbitrators. The trial Court dismissed the action. The Appellant further appealed to the Nigerian Court of Appeal. In dismissing the appeal, the Nigerian Court of Appeal held that the refusal of Ukeje, C.J., to appoint Arbitrators did not tie the hands of the successor-in-office, Mustapha C.J., to consider or review the new request for the appointment of Arbitrators because the application to the Chief Judge of the Federal High Court was to fulfill the contractual clause binding on the parties in which the role of the Chief Judge of the Federal High Court was to facilitate the process by appointing Arbitrators within the contractual arrangement of the parties.

From the above decision, it appears that institutional-based arbitration may be preferable to ad hoc-based arbitration. This is because the parties had wasted time and resources to ensure that the appointment of arbitrators was validly made, particularly where the former C.J. of the Federal High Court had refused to appoint Arbitrators despite parties' agreement in that regard.

The Forum or Place of Arbitration must be specified, and the place must be where parties intended

Sometimes, parties copy and paste arbitration clauses without altering the place of arbitration, and when a dispute ensues, parties would observe that they had agreed to arbitrate in a location/place different from where they would have ordinarily considered. This is majorly because of the costs involved in conducting the arbitration hearing abroad.[16] While in some circumstances, the entire contract containing the arbitration clause is made in unilateral form without allowing the other party to review and make amendments, i.e., take it or leave it the basis.[17]

In Sacoil (Nig) Ltd & Anor -v- Transnational Corporation of (Nig) Plc [18], a dispute arose between the parties’ Farm-Out and Participation Agreement ("F.O.P.A."). The agreement had an arbitration clause that specifically stated that "[t]he place of Arbitration shall be London, England.” However, when a dispute ensued, the Respondent commenced an action in Court and contended that the agreement, if enforced, would oust the jurisdiction of the Court in Nigeria since the parties by the agreement covenanted to have the place of arbitration in London. The Respondent claimed that the effect of the clause is that only the courts in London (as the seat of arbitration) would have jurisdiction over the commencement of arbitral proceedings and enforcement of an arbitral award. The trial Court upheld the contention of the Respondent. The Appellant appealed to the Nigerian Court of Appeal, and the appeal was allowed, and for that reason, a stay pending arbitration was granted. The Court of Appeal premised its decision in allowing the request on the ground that parties are bound to arbitrate and cannot use the fact that the arbitral proceedings are to be held in London as a basis to opt-out of the arbitration agreement.

Similarly, in Sonnar (Nig) Ltd & Anor vs. Partenreedri M.S. Nordwind (Owners of the Ship M) & Anor [19] The Plaintiffs, Sonnar Nig. Ltd. and Public Impex traders entered into an agreement[20] (which is evidenced by a bill of lading) with the Defendants [Partenreedric Norwind (the ship owners who are based in Germany and the issuer of the Bills of Lading) and, Bandridge Shipping Company (based in Liberia)] and Chaiyapon rice company based in Thailand. The bill of lading had an arbitration clause that specified that any dispute arising under the bill of lading shall be decided “where the ‘carrier’ has his principal place of business, and the law of such country shall apply except as provided elsewhere herein.” The carrier is the 1st Defendant, Partenreedric M. S. Norwind of Germany. A dispute arose for the non-delivery of 25,322 parboiled long grain rice bags. The Plaintiffs brought a suit at the regular Court claiming damages for the breach on April 23, 1980. The Defendants contended that the forum for litigation regarding the action was west Germany, not Nigeria. The trial Court (Federal High Court), after hearing evidence, granted a stay of proceedings pending arbitration. The Nigerian Court of Appeal affirmed the decision of the trial Court. Dissatisfied, the Appellant appealed to the Nigerian Supreme Court. The Supreme Court, on November 13, 1986, allowed the appeal and dismissed the application for stay of proceeding on the ground that if a stay is granted, the party would not have the opportunity to bring an action in the German Court since the cause of action would be statute-barred by limitation. Hence, the apex court ordered that the matter be heard and determined conclusively at the trial Court.

It is interesting to note that if the parties' arbitration clause were worded and appropriately negotiated by the parties in the above cases by stating in clear terms that the arbitral proceedings should be conducted in Nigeria, they would not have wasted in prosecuting the matter at the regular Courts. Therefore, the need to negotiate the arbitration clauses is highly recommended.

Importance of well-drafted Arbitration clauses

It will be readily observed that the importance of well-drafted Arbitration clauses has been aptly demonstrated in the various Nigerian case laws cited above. What reverberates in the cited Nigerian cases is the fact that Arbitration clauses should be properly negotiated, and this point cannot be overemphasized. Therefore, well-drafted Arbitration clauses will help to reduce the following risks:

It is, however, a welcome development that the recurrent and common feature in all these cases is that despite the extensive contentions of the respective aggrieved parties, the Nigerian appellate Courts consistently maintained the stance that once parties have agreed to arbitrate in their agreements, they must be referred to arbitration despite the pathological clauses.  The rationale is premised on the principle that parties cannot be permitted to resile from their agreements to arbitrate under the guise of a pathological clause.

Conclusion

Parties are encouraged to adopt a conservative approach by engaging lawyers specially skilled in the field of arbitration in drafting and negotiating their arbitration clauses in detail before signing arbitration clauses or agreements.

Therefore, defining clearly all the relevant terms in an arbitration clause like the scope of the dispute, place of arbitration, appointing authority, procedural law, and making arbitration mandatory where there is a dispute will undoubtedly help to clearly describe all the main aspects of a legal arbitration agreement in a way that parties intended. The above approach will minimize court intervention in resolving preliminary potential hazards with attendant costs and time and as a result put an end to an era of pathological clauses.

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* Fellow of Chartered Institute of Arbitrators, Prime Dispute U.K., Arbitrators’ and Mediators’ Institute of New Zealand, and Malaysian Institute of Arbitrators. He earned his Master of Laws (LL.M.) degree in White & Case International Arbitration in University of Miami, School of Law, Florida, United States of America.

[1] Chapter 18, Laws of Federation of Nigeria 2004.

[2] United Nations Commission on International Trade Law

[3] Section 1 of the Act.

[4] Sections 48 (b) (i) & (ii) and 52 (2) (ii) of the Act provide that even when an award has been procured, and it becomes clear that an agreement on which the arbitral award was premised on arose from an invalid contract or the subject matter of the dispute is not capable of settlement or is contrary to public policy, such an award is bound to be set aside.

[5] The Nigerian Court of Appeal has held two decisions in Esso Petroleum and Production Nigeria Ltd & Anor. (S.N.E.P.C.O.) vs. N.N.P.C. unreported Appeal No. CA/A/507/2012; delivered on July 22, 2016, and Shell (Nig.) Exploration and Production Ltd & 3 others vs. Federal Inland Revenue Service unreported Appeal No. CA/A/208/2012; delivered on August 31, 2016, that tax disputes arising from a Production Sharing Contract (P.S.C.) are not arbitrable because the subject matter of the conflict is within the exclusive jurisdiction of the Federal High Court

[6] Kano State Urban Development Board V. Fanz Construction Ltd. (1990) 4 N.W.L.R. (PT.142) 1 at 32-33.

[7] Celtel Nigeria B.V. V. Econet Wireless Limited & Ors (CA/L/895/2012) [2014] N.G.C.A. 28.

[8] Heyman v. Darwins Ltd (1942) A.C. 356; (1942) 1 All E.R. 337

[9] Travelport Glob. Distribution Sys. B.V. v. Bellview Airlines Ltd., No. 12 CIV. 3483 DLC, 2012 WL 3925856, at *1 (S.D.N.Y. September 10, 2012)

[10] (2013) LPELR-22370 (CA).

[11] Conex Florida Corp. v. Astrium Ltd., 499 F. Supp. 2d 1287 (M.D Fla. 2007); Hirschenson v. Spaccio, 800 50. 2d 670 (Fla. 5th D.C.A. 2001); Moses H. Cone v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).

[12] Travelport Global Distribution Systems B.V., (S.D.N.Y. September 10, 2012).

[13] (2019) LPELR-48996 (SC), (2019) 13 NWLR (1690) 439 S.C.

[14] Section 52 (2) of the Arbitration and Conciliation Act

[15] (CA/L/895/2012)[2014] N.G.C.A. 28.

[16] Sacoil 281 (Nig) Ltd & Anor -v- Transnational Corporation of (Nig) Plc (2020) LPELR-49761(CA).

[17] Sonnar (Nig) Ltd & Anor vs. Partenreedri M.S. Nordwind (Onwers of the Ship M) & Anor (1987) LPELR-3494(SC).

[18] (2020) LPELR-49761(C.A.)

[19] (1987) LPELR-3494 (SC).

[20] The agreement was to ship 25,322 bags of parboiled long-grain rice from Thailand to Nigeria.