Surviving a pathological clause in Nicaragua

By: Gerardo Martín Hernández

The basis of any arbitration proceeding is the arbitration clause. Based on this clause, the tribunal will be structured, certain procedural rules will be adopted, and the essential aspects of that particular arbitration will be defined. A good arbitration clause guarantees a smooth process, while a bad one is a sure path to disaster.

The arbitration clause is often referred to as the “midnight clause” because contract negotiations tend to focus on the business aspects of the deal, at which point the parties believe that they will both benefit from it and pay less attention to the possibility of conflict. That is why once the commercial terms have been agreed upon and the parties are about to pop the champagne, at the stroke of midnight, someone remembers that a form of conflict resolution must be included and, under pressure to conclude the contract, they make use of a clause they found somewhere or call a friend to send one they have used in another contract.

This haste or lack of knowledge often gives rise to what are known as “Pathological Clauses”, which will surely cause serious problems in the arbitration process and may even lead to the impossibility of the arbitration or the nullity of the proceedings.  The origin of pathological clauses is usually linked to a lack of knowledge of arbitration procedures, haste, and the copying of obsolete clauses.

Some of the typical toxic clauses are:

  • The undecided clause: in this clause the parties establish arbitration as a mechanism for dispute resolution, but also establish the option of going to court. This sometimes happens when the scope of the problems to be resolved by arbitration is set in a limited manner and there remains the doubt as to whether disputes not mentioned in the clause should be resolved in arbitration or in court. “The parties agree that any disagreement relating to the interpretation of the contract shall be resolved in arbitration, other disputes shall be resolved in court.”
  • The overly tailored or unrealistic expectations clause: in this type of clause, the parties express criteria that are very difficult to achieve such as special qualifications of arbitrators that cannot be easily met. Another form in which it occurs is when too short deadlines are set for resolving complex issues. “arbitrators must be lawyers specialized in maritime law, speak Spanish, French, Mandarin and Italian and must render the award within a period not exceeding one month.”
  • The “Procedural Code” clause: this type of clause tries to foresee all possible situations as if it were a real procedural code which ends up being harmful to the process.
  • The outdated clause: this is originated when an old clause is used that contemplates the intervention of a body that no longer exists or that simply will not intervene in the arbitration process because it is not part of its functions. Example: “the third arbitrator shall be appointed by the President of the Republic”. It may also happen that a clause that was originally suitable, becomes pathological due to supervening circumstances such as the case of a clause establishing institutional arbitration and that the center is dissolved subsequent to the adoption of the clause.

Thus, it often happens that arbitrators, once appointed, find that the arbitration clause is unclear, incomplete or simply pathological and realize that if the clause is enforced, they will probably end up in a voidable proceeding. The dilemma that arises is, if the arbitrators follow the clause as it is, they will end up creating a process full of difficulties and plagued with allegations of nullity, and if they act according to sound arbitration practices outside the clause, they expose themselves to the risk that the losing party will file for the nullity of the proceeding for having conducted it in a manner different from that agreed in the clause.

Joint action by the arbitrators and the parties can help to circumvent this problem. The arbitrators should play an active and proactive role and propose to the parties either the adoption of arbitration rules already proven in national practice or other rules already proven in the international sphere, such as those of the United Nations Commission on International Trade Law (UNCITRAL).

It is advisable that, in the early sessions, the arbitrators propose to the parties to clean up any problems with the clause; it is believed that the parties will be more likely to cooperate in this regard when the process is at an early stage than when the process is well advanced. The simplest way to correct the effects of a dangerous clause is to go back to the definition of the essential elements of validity of arbitration clauses and leave the specific elements to be regulated by one of the existing arbitration rules. The opportunity should be taken to correct any of the defects of the pathological clause, e.g. setting reasonable time limits for the award, modifying the system of appointment of arbitrators, deleting the reference to non-existent institutions, etc.

 In addition to the adoption of any of the solutions already developed by arbitration bodies, it is important that the modification made includes a clear statement that the original clause is modified by the agreement of the parties and that in the event of a dispute the subsequent agreement will prevail over the original clause.

If this is not possible, it is my opinion that both an arbitral tribunal and the judicial authorities, in the presence of a pathological clause, should apply the “Pro-Arbitration Principle” by virtue of which the expressed will of the parties to resolve the dispute through arbitration proceedings must be preserved. This solution is entirely feasible in countries where the arbitration legislation is inspired by the “UNCITRAL Model Arbitration Law“, since this type of law contains supplementary rules to complete all the necessary elements for the development of an arbitration procedure. Based on this approach, it is feasible that a clause that at first sight is inapplicable, is viable in application of the supplementary rules that resolve issues such as: appointing authority, applicable law, procedural rules, venue, etc.

In conclusion, I believe that it is possible and desirable to rescue an arbitration that was initially at risk due to the presence of a pathological clause, proactive arbitrators can, together with the parties, survive a pathological clause with dignity or simply apply the “Pro-Arbitration” principle and make the will of the parties to arbitrate their dispute prevail.