Pathological arbitration clauses

Pathological arbitration clauses | Daily Tribune

In the Philippines, arbitration is increasingly becoming a preferred mode of settling disputes, especially in commercial contracts outside the regular court system due to its apparent efficiency, confidentiality, and finality. It offers parties a fast-paced yet efficient process of arriving at an immediately executory judgment without having to undergo a lengthy court procedure.

The effectiveness of an arbitration proceeding, however, is only as good as how it is drafted.

Poorly drafted clauses — commonly referred to as “pathological clauses” — can lead to delays, increased costs, and even render the arbitration agreement unenforceable.

A pathological arbitration clause is one that is defective or ambiguous, resulting in uncertainty or disagreement over the conduct of the arbitration. An arbitration clause becomes pathological when it fails to specify certain information such as the applicable arbitration rules, the preferred or exclusive arbitral institution, the chosen seat of arbitration, and the governing law. At times, pathological arbitration clauses take the form of conflicting provisions or conditions precedent that lead to an unclear finding of the parties’ intent to arbitrate.

The Alternative Dispute Resolution (ADR) Act of 2004 (Republic Act 9285) recognizes the enforceability of arbitration clauses, provided they reflect the clear and unequivocal intent of the parties to submit their dispute to arbitration. However, if the clause is vague or inherently contradictory, the court may intervene to determine its validity, often defeating the purpose of arbitration as a streamlined process.

For instance, a clause stating that “disputes shall be referred to arbitration in accordance with the rules of Philippine courts” is inherently defective, as Philippine courts do not have arbitration rules. Similarly, naming a non-existent arbitration institution or using imprecise terminology — such as “mediation-arbitration under Philippine law” — without further elaboration can lead to interpretational issues.

In Fruehauf Electronics Philippines Corporation v. Technology Electronics Assembly and Management Pacific Corporation (G.R. No. 204197, 23 November 2016), the Supreme Court reiterated the importance of clarity in drafting arbitration clauses, holding that courts must uphold the parties’ intent to arbitrate when clearly expressed. Otherwise, a pathological clause will just frustrate the parties’ intent to arbitrate.

To avoid pathological clauses, drafters must ensure that arbitration provisions are precise, consistent and complete. It is advisable to specify the arbitral institution (e.g., PDRCI, CIAC, or SIAC), the governing rules, the seat of arbitration, and the language of proceedings. Lawyers should be meticulous in drafting contracts containing arbitration clauses, as any defect may be exploited by a party seeking to avoid arbitration.

In conclusion, arbitration clauses must be drafted with the same rigor as the contract itself. Avoiding pathological clauses not only safeguards the integrity of dispute resolution but also upholds the parties’ autonomy and contractual intent.