Why arbitrations clauses are important – pitfalls and opportunities seen from a Danish perspective

Many contracts often include an arbitration clause. Despite being one of the most important provisions in a contract, the arbitration clause is often placed near the end of the contract and often the substance and wording of the provision is not given much attention. However, an inadequate or unsuitable wording of an arbitration clause is a pitfall than can lead to unwanted and unnecessary consequences for the parties.

If nothing is stated in the agreement the starting point in Danish law is of course that disputes are settled by the ordinary courts. This is also the case in Schjødt's other jurisdictions (Norway, Sweden and UK), and assumingly in most of the world. However, the parties can agree to resolve disputes through arbitration, cf. section 7 of the Danish Arbitration Act (Da. "Voldgiftsloven"). The agreement on arbitration is often inserted in contracts and thus agreed upon before the dispute arises. However, the parties can also agree on arbitration after the dispute has arisen.

Arbitration is characterised by the parties setting up an arbitral tribunal which resolves the dispute with binding effect for the parties. The arbitral award can then be enforced according to the same rules as judgements, cf. section 38(1) of the Danish Arbitration Act. However, the courts have an important "supervisory role" over arbitral tribunals and can in certain cases set aside an arbitral award as invalid.

Arbitration has both advantages and disadvantages compared to dispute resolution before the ordinary courts. Whether the parties prefer arbitration or court proceedings depends on the individual needs of the parties in each case, however, a number of factors can be pointed out that often affect this choice.

One of the main reasons for choosing arbitration is that the parties have the autonomy to select arbitrators (arbitration tribunal) with specific expertise relevant to the dispute. Additionally, arbitration proceedings are conducted privately allowing parties to maintain a greater level of confidentiality. Moreover, arbitration typically has shorter processing times compared to traditional court proceedings and the arbitral awards are generally not subject to appeal leading to quicker resolutions.

In Denmark, arbitration can be agreed upon for all civil law matters over which the parties have free disposal unless otherwise stipulated (in regulation), cf. section 6 of the Danish Arbitration Act.

However, there are also certain restrictions on who can enter into arbitration agreements. For example, an arbitration agreement concluded before the dispute arises is not binding on a consumer, cf. section 7(2) of the Arbitration Act.

The Arbitration Act does not stipulate any formal requirements for the arbitration clause, but special legislation may require a specific form of arbitration agreement, e.g. section 311(1) of the Danish Maritime Act (written agreement). However, to be valid, an arbitration agreement must be limited to a specific legal relationship. Thus, the parties cannot validly decide that any dispute that may ever arise between them, for whatever reason and in whatever context, shall be submitted to arbitration.

Danish arbitration is governed by the so-called doctrine of separability according to which the arbitration clause must be judged as an agreement separate from the main agreement. The arbitration clause may thus "survive" even if the parties' main agreement is otherwise invalid or lapses for that reason.

The legal effect of arbitration is first and foremost that disputes covered by the arbitration clause must be dismissed by the courts if the counterparty claim this, cf. section 8 (1) of the Danish Arbitration Act.

The arbitral tribunal can either be established through an arbitration institution (institutional arbitration) or by the parties establishing an arbitral tribunal on their own initiative without any connection to a permanent arbitration institution (ad hoc arbitration).

If institutional arbitration is chosen, the parties must generally select and refer their dispute to an arbitration institution and its rules in their arbitration agreement. One of the main advantages of institutional arbitration is that the proceedings are conducted within in a more fixed framework. In Denmark institutional arbitration are often used. Examples include the Danish Building and Construction Arbitration Board and The Danish Institute of Arbitration. In Norway, in contrast, ad hoc arbitrations are very common. For more on this, we refer to the article from Andreas A. Johansen and Michael Decker in the same newsletter.

An arbitration agreement may also be agreed upon using standard terms. For example, in many Danish construction projects of a certain size, the parties agree to use the standard terms AB18 (agreed documents) according to which disputes between the parties are finally resolved by arbitration by the Danish Building and Construction Arbitration Board.

If the parties prefer ad hoc arbitration, the arbitration clauses are in Denmark typically longer and more detailed than institutional arbitration clauses, particularly in terms of the procedure for the arbitration including how the arbitrators are to be appointed etc. While the procedure in institutional arbitration is generally predetermined in the rules of procedure of the chosen institution, the parties in ad hoc arbitration have greater opportunity to "customise" the procedural framework.

In summary, the wording and substance of an arbitration clause is of great importance for any agreement and should be drafted to meet a potential dispute. In this regard, it should be considered if the case should be settled through an arbitration institution or by ad hoc arbitration. The clause must in all cases be formulated in such a way that it gives no reason for contesting the validity of the arbitration clause.