“An arbitration clause is a clause in a business contract that requires that if any dispute between parties occurs then that can be resolved through arbitration process” Discuss.


An arbitration clause is a clause in a business contract that requires that if any dispute between parties occurs then that can be resolved through arbitration process. But it doesn’t necessarily have to specify that arbitration occurs within a specific jurisdiction[1], it binds the parties to a type of resolution outside of the courts. So it is considered as a forum selection clause. A business contract may contain such an arbitrary clause by which the parties to the contract agree to arbitrate any future dispute.

It compels the parties to hire a neutral party to decide which side prevails after hearing arguments and examining evidence. Courts are not involved.

A process in which a disagreement between two or more parties is resolved by impartial individuals, called arbitrators, in order to avoidcostly and lengthy litigation.[2]

Any type of disagreement can be arbitrated, including disputes involving businesses and consumers, employment claims, real estate and construction issues. It is utilized when there is an adversarial situation and the parties wish to resolve the dispute in private without court litigation.

Arbitration Act in Bangladesh:

In Bangladesh the prevailing arbitration clause is actually came from the Arbitration Act, 1940. Three types of arbitration are contemplated by the Arbitration Act of 1940, namely

(i)      Arbitration in the course of a suit,

(ii)    Arbitration with the intervention of the court, and

(iii)   Arbitration otherwise than in the course of a suit and without the intervention of the court in practice, the last category attracts the maximum number of cases.

Under this Act an arbitration agreement must be written but it’s not needed to be registered. The name of the arbitrator may be included in the agreement or left to designate later either by the consent of the two parties or by any other way mentioned in the agreement. Very often, the rules of prestigious commercial bodies lay down that a person who becomes a member of the association must accept the machinery of arbitration created or recognized by the rules of the association.  This also amounts to an “arbitration agreement” for the purposes of the Arbitration Act, 1940.[3]

Bangladesh council of Arbitration:

The parties can construct their arbitration clause based on the contract and refer all or certain disputes which have arisen or which may arise to the Bangladesh Council of Arbitration. The Bangladesh Council of Arbitration recommends to use any of the following arbitration clauses in writing in their contracts:[4]

ü      “Any dispute or difference whatsoever arising between the parties out of or relating to the construction, meaning, scope, task or effect of this contract or the validity or the breach thereof shall be established by arbitration in accordance with the Rules of Arbitration of the Bangladesh Council of Arbitration and the Award made in pursuance thereof shall be binding on the parties.”


ü      “All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the Bangladesh Council of Arbitration by one or more arbitrators appointed in accordance with the said Rules.”

The process of Arbitration:

Once an arbitration agreement is entered into for submitting future differences to arbitration, it is not, necessary to obtain the fresh consent of all the parties for a reference to arbitration at the time when the dispute actually arises.

Referable disputes in Arbitration Clause:

All types of justiciable matters of a civil nature may be referred to arbitration but there still remain exceptions. The issues of disputes that are not only fact or law but also involves questions of public welfare are not permitted to be referred like matrimonial dispute to arbitration.

Arbitration is used for the settlement of disputes between the members of associations and between different exchanges in the securities and commodities trade. Many contracts contain standards referring the rules of the organization that set the arbitration clause. Numerous arrangements between the parties in industry and commerce also provide for the arbitration of controversies arising out of contracts for the sale of manufactured goods, for terms of service of employment, for construction and engineering projects, for financial operations, for agency and distribution arrangements, and for many other undertakings.


The selection of an arbitrator is very important in the arbitration process because an arbitrator’s ability, skill and fairness are very important element in the process of arbitration. Generally an arbitrator is selected by both the parties at the time of the conclusion of the arbitration agreement. Selection of arbitrators is also often made by agencies administering commercial arbitration, under pre-established rules of procedure.  These organizations, including various trade associations, and Chambers of Commerce, maintain panels of expert arbitrators.  The parties may either make their own selection or entrust the appointment of the arbitrators to the organization.

One should accept appointment as an arbitrator only if fully satisfied:

(1) He or she can serve neutrally;

(2) He or she can serve self-sufficiently from the parties, potential witnesses,

and other arbitrators;

(3) He or she is capable to serve; and

(4) He or she can be accessible to commence the arbitration in accordance with

the requirements of the proceeding and to dedicate the time and attention to its conclusion that the parties are sensibly entitled to expect.


If confidentiality is significant, you should consider including an express obligation to keep the arbitration and all materials generated for the purpose of the arbitration private in the arbitration clause. You may not essential to do this in all cases, as some of the institutional guidelines already deliver for confidentiality.

The procedure of arbitration:[5]

Arbitration process is governed by the rules mention in the agreement by the consent of the parties. The process will be determined by the arbitrator. The arbitration proceeding must be fair and equal for both the parties. The arbitrator has the power to request the parties or any third person to produce documents and books and to enforce such a request by issuing subpoenas through court. If a party fails to show up at the time of hearing without any legitimate cause, the arbitrator may proceed in the absence of that party and then render an award after investigation of the matter in the dispute.

The Arbitration Act adopts the method, that in the working of an arbitration agreement, the parties are free to lay down provisions concerning various matters of process.  But in the absence of ancontract, the rules enclosed in the First Schedule to the Arbitration Act, 1940, apply.

An arbitrator can be removed for wrongdoing. In applying this provision courts follow the wide construction accepted in most commonwealth countries, so that, it is not simply misconduct concerning immorality that attracts this power, but also misconduct of a technical nature, for instance, a breach of the rules of natural justice.

Detailed provisions are there for settling the problems that might rise where two or more arbitrators are contemplated by the arbitration contract and a variance of opinion rises between them.
Law to be applied in transnational transactions

The statutory law of various countries and the rules of agencies administering commercial arbitration contain provisions on the form, certification, notification, and delivery of the award.  The arbitrator must submit these requirements.

Substantive Law

A much discussed question in commercial arbitration concerns the substantive law to be applied by the arbitrators.  Generally, the award must be based upon the law as determined by the parties in their agreements.  This failing, the arbitrator must apply the law which he considers proper accordance with the rules of conflict of laws.  In both the cases, the arbitrator will have to take account of the terms of the contract and the usages of the specific trade.

The arbitrator and the court

Challenges to the process of arbitration are not uncommon.  A party may claim, for example, that no valid arbitration agreement came into existence, because the person signing the agreement had no authority to do so or that a condition precedent to arbitration had not been fulfilled.  More often, the validity of arbitration is contested on the ground that the specific controversy is not covered by the agreement.  In such cases, the question whether the arbitrator has authority to deal with the conflict is usually determined by a court.

Challenges before the courts against the award cannot be excluded by agreement of the parties, since the fairness of the arbitration process as a quasi judicial proceeding has to be maintained by the legal system.

Challenges before the court are, however, confined to specific grounds and specific matters.  A review of the award by a court will not generally deal with the arbitrators decisions as to facts or with his application of the law.  The jurisdiction of the court is thus restricted.  The arbitration process must be the end and not the beginning of litigation.

 Filing the award

An award of the arbitrator must be filed in the court and a decree obtained in terms thereof.  The decree so obtained can be executed, like any other decree of the court.  However, the court may, instead of confirming the award, remit it to the arbitrator, modify it or set it aside for the specified causes.  Most of the orders passed by a court under the provisions of the Arbitration Act, 1940 in this regard are subject to appeal.

Competent Court

The court having jurisdiction under the Arbitration Act 1940 is the court in which a suit on the matter under dispute could be instituted.

Provisions have been enacted in the Act to deal with questions concerning the cost of arbitration and the procedure to be followed by the arbitrators regarding filing of the awards.  In case of difference of opinion among an even number of arbitrators, the parties can provide for an umpire.  Generally, most of the provisions applicable to arbitrators apply, with necessary modifications, to umpire also.

How to conduct an arbitration hearing – model form (six stages)[6]


ü      Prepare- by reading referral and other documents submitted

ü      At the beginning introduce the parties

ü      Advise parties of any interest in the matter

ü      Advise parties of any contact with parties prior arbitration

ü      Advise of the language to be used and ensure presence of interpreter

ü      Advise as to Rules of Proceedings

ü      Advise as to Role of Arbitrator and Powers

ü      Observe rights of parties

ü      Advise of right to revert to conciliation

ü      Inform of housekeeping preparations


ü      Enquire whether parties intend raising preliminary issues

ü      Raise own initial concerns

ü      Explain initial issues to other party

ü      Give parties an chance to lead evidence on initial issues if necessary

ü      Invite each party to argue initial issue

ü      Decideinitial issue before dealing with merits


ü      Enquire whether both practical and practical fairness, or only one  in dispute

ü      Identify grounds for challenge

ü      Investigate into relief

ü      Enquire from employer extent of obligation

ü      Allow parties to ask questions in explanation

ü      Ask parties to designate documents relied upon and witnesses they intend calling

ü      Query from parties legal principles applicable if represented


ü      Record evidence and give each party chance to question witnesses

ü      Reject other witnesses whilst one is testifying

ü      Swear witnesses in or affirm

ü      INQUISITORIAL- arbitrator poses questions, then party who called witness may ask questions, then other side cross-examines and finally re-examination

ü      ADVERSARIAL- party who called witness questions questions, then other side cross-examines and lastly re-examination


ü      To address arbitrator on why one version is to be favored

ü      Evidences relied upon

ü      Why those facts should be believed

ü      Which evidences relied upon by other side are not accepted

ü      Why those evidences should not be believed or not be accepted

ü      Relief sought

ü      Legal values applicable


n      AWARD

ü      Evidencesabout the referral

ü      Ruling on prelim subjects and reasons therefore

ü      Nature of argument

ü      Contextual facts

ü      Summary of evidence

ü      Study of evidence

ü      Examination and determination of remedy

ü      ORDER

Advantages of Arbitration:[7]

  • when the subject material of the dispute is extremely technical, arbitrators with an appropriate degree of skill can be appointed
  • arbitration can be inexpensive and more flexible for businesses
  • arbitration awards are generally easier to enforce in other nations than court judgments
  • in most legal systems there are very inadequate avenues for appeal of an arbitral award, which is occasionally an benefit because it limits the length of the dispute and any associated obligation
  • arbitral proceedings and an arbitral award are generally non-public, and can be made private
  • in arbitral proceedings the language of arbitration may be selected, whereas in judicial proceedings the official language of the country of the competent court will be spontaneously applied

Some of the disadvantages include:[8]

  • in some arbitration agreements and systems, the retrieval of attorneys’ fees is unavailable, making it problematic or unbearable for customers or staffs to get legal picture.
  • most arbitration codes and agreements deliver for the same release that could be decided in court
  • if the arbitrator or the arbitration forum depends on the company for recurrence business, there may be an intrinsic incentive to rule against the consumer
  • there are very limited avenues for appeal, which means that an erroneous decision cannot be easily overturned
  • though usually thought to be quicker, when there are multiple arbitrators on the panel, juggling their agendas for hearing dates in long cases can lead to postponements
  • in some legal systems, arbitrary awards have fewer implementation options than rulings;
  • arbitrators are generally unable to enforce interlocutory measures against a party, making it easier for a party to take steps to avoid implementation of member or a small group of members in arbitration due to growing legal fees, without explanation to the members the opposing consequences of an disapproving ruling
  • rule of applicable law is not necessarily binding on the arbitrators, although they cannot disregard the law
  • discovery may be more limited in arbitration or entirely nonexistent
  • the potential to generate billings by attorneys may be less than pursuing the dispute through trial
  • Unlike court judgments, arbitration awards themselves are not directly enforceable. A party seeking to enforce an arbitration award must resort to judicial remedies, called an action to “confirm” an award
  • Although grounds for attacking an arbitration award in court are limited, efforts to confirm the award can be fiercely fought [thus necessitating huge legal expenses that negate the perceived economic incentive to arbitrate the dispute in the first place.
  • arbitration may become extremely complex
  • arbitration may be topic to pressures from powerful law firms representing the stronger and richer party
  • arbitration agreements are occasionally contained in auxiliary agreements, or in small print in other agreements, and customers and staffs often do not know in advance that they have agreed to compulsory binding pre-dispute arbitration by buying a product or taking a occupation
  • if the arbitration is obligatory and binding, the parties waive their privileges to access the courts and to have a magistrate or jury decide the case
  • in some arbitration agreements, the parties are obligatory to pay for the arbitrators, which adds an additional layer of legal cost that can be prohibitive, especially in small customer disputes

Practical Implication of the arbitration clause:

Suppose a trade agreement between a producer and a wholesaler has been signed. In the contract all the required conditions are mentioned. The rules of the trade, payment methods, date of deliveries, conditions to reject the products etc. everything has been specified in the agreement.

This agreement also contains an arbitration clause to settle any dispute occurs in the future between the tow parties. Now suppose the producer has sent the products to the wholesaler and wholesaler refuses to accept the products due to some inferior quality. But the conditions mentioned in the contract required to consider the products to be inferior and so to be rejected are not matched with this scenario. The wholesaler is claiming that the products are inferior but the producers is objecting to that claim and trying to prove that the products are all right. So a big confusion and disagreement is created based on this issue.

To settle down such a dispute between the parties of the trade agreement arbitration clause will help to get help from an arbitrator to settle down the problem without taking it to the court. Taking any problem to the court requires lots of money. It also takes through lots of hassles and makes the procedure very lengthy. So arbitration is an alternative to such problem. Arbitration helps too resolve the matter quickly and with less hassle.


Though arbitration clause in a business contract has a few disadvantages it’s still useful because if any disagreement occurs between two parties it can be resolved by an arbitrator without going to the court. This is the best advantage of the arbitration clause. Not only that, it ensures the confidentiality. It is utilized to save money and time. It’s basically an alternative of the court. Many businessmen try to avoid of being involved with court for any problem. For them arbitration clause is very helpful. So based on these facts I believe arbitration clause in any contract of business is very helpful.


  1. http://www.usam.com/services/arb_clause.shtml
  2. http://www.jurisint.org/doc/html/cla/en/2006/2006jiclaen2.html
  3. http://www.vakilno1.com/saarclaw/bangladesh/arbitrationlaw/arbitration_law_in_bangladesh.htm
  4. http://en.wikipedia.org/wiki/Arbitration
  5. http://www.gvsu.edu/arbitrations/index.cfm?id=28A921A5-0C00-3F93-2F45AC8BBD157B88
  6. http://www.wisegeek.com/what-is-an-arbitration-hearing.htm
  7. http://www.investorwords.com/249/arbitration.html

[1]Jurisdiction (from the Latinius, iuris meaning “law” and dicere meaning “to speak”) is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility. The term is also used to denote the geographical area or subject-matter to which such authority applies, collected from http://en.wikipedia.org/wiki/Jurisdiction

[2] Definition taken from http://www.investorwords.com/249/arbitration.html

[3]Collected from Arbitration law in Bangladesh, http://www.vakilno1.com/saarclaw/bangladesh/arbitrationlaw/arbitration_law_in_bangladesh.htm

[4] Collected from Bangladesh Council for Arbitration Recommended Arbitration Clause, http://www.jurisint.org/doc/html/cla/en/2006/2006jiclaen2.html

[5] Collected and complied from “the procedure in arbitration” http://www.vakilno1.com/saarclaw/bangladesh/arbitrationlaw/arbitration_law_in_bangladesh.htm

[6]Collected from a pdfppt slides done by 2008 Commissioners Indaba,

[7] Taken from “advantages of arbitration” http://en.wikipedia.org/wiki/Arbitration

[8]Taken from “disadvantages of arbitration” http://en.wikipedia.org/wiki/Arbitration