7.01  This chapter examines the scope and interpretation of consent to arbitration. The most frequent issue that arises in the interpretation of international arbitration agreements concerns the ‘scope’ of the parties’ agreement; ie what category of disputes, disagreements, or claims have the parties agreed to arbitrate.¹ The importance of this question is given by the fact that the objective scope of the arbitration agreement delimits the arbitral tribunal’s jurisdiction ratione materiae.² Whether the prayers for relief submitted to an arbitral tribunal are covered by the arbitration agreement depends on its objective scope, and is therefore a condition of admissibility.³ The New York Convention recognizes the necessity of interpreting the scope of an arbitration agreement, and provides for the non-recognition of awards that exceed the scope of the agreement to arbitrate.⁴ Like the New York Convention, national arbitration legislation recognizes the need for interpreting the scope of arbitration agreements, but generally without prescribing rules of construction. There are very few exceptions to this approach.⁵

7.02  The chapter begins by looking at which disputes are covered by the arbitration agreement (Section A). Insofar as the parties have reached mutual consent, the arbitration agreement is deemed to cover all disputes between the parties, provided that they are arbitrable and arise out of the relationship to which the arbitration agreement refers.⁶ In practice, disputes about the scope of an arbitration clause generally concern questions of whether the language of the parties’ agreement extends to all contractual claims under a particular contract (or, instead, only a specified sub-set of such claims) or whether non-contractual claims (ie tort, delict, breach of non-contractual or statutory protections) are subject to arbitration.⁷

(p. 120) 7.03  The chapter then analyzes set-off and counterclaims (Section B). For arbitration agreements language should be used which identifies the generic issues between the parties, eg ‘disputes arising out of or in connection with this contract, including any question regarding its existence, validity or termination’⁸—this may facilitate set-off and counterclaims being addressed in the same arbitration.⁹

7.04  The chapter concludes by discussing the interpretation of consent to arbitration (Section C). On the one hand by examining the application of the general principles of interpretation and, on the other hand, the question of whether interpretation has to occur with a particular inclination.

7.05  It is important to ensure that the wording adopted in an arbitration agreement is adequate to fulfil the intentions of the parties.¹⁰ Most arbitration agreements are broadly worded, and, usually, when parties agree to resolve any disputes between them by arbitration, they intend to resolve all disputes between them by this method (unless a specific exception is made).¹¹ This is also the case when the model clauses of arbitration institutions are adopted by the parties.¹²

7.06  The various arbitration institutions recommend model clauses with broad wording by referring to ‘all’¹³ or ‘any dispute’,¹⁴ ‘all disputes, controversies, and differences’¹⁵ or just generally ‘disputes, controversies, or claims’.¹⁶ On the other hand, the reference to ‘each dispute’ or ‘a dispute’ could be interpreted to mean that each dispute should be the subject of a separate arbitration.¹⁷

7.07  In identifying the link between the dispute and the contract clauses such as ‘arising from/arising out of or in connection with’¹⁸ or ‘arising out of or relating to or in connection with’ are used.¹⁹ Clearly the terms ‘relating to’ and ‘in connection with’ are wider than ‘arising out of’ a particular contract and this wider language may allow a tribunal to deal with a peripheral agreement which relates to, but is separate from, the main agreement in which the arbitration agreement is contained—even though it is not expressly or directly covered in that main agreement.²⁰ With regard to ‘arising under’, authorities have reached divergent conclusions: some national courts have concluded that arbitration clauses using the formulation ‘arising under’ are broad, whereas others have held that the formulation is ‘narrow’.²¹

7.08  Authorities have usually concluded that the wordings ‘all disputes’ or ‘any disputes’ extend to all disputes having any plausible factual or legal relation to the parties’ agreement or dealings.²² (p. 121) From the case law it has generally emerged that there are three categories of claim that are potentially within the scope of an arbitration agreement:

• •  contractual claims (including claims incidental to the contract, such as quantum meruit);

• •  claims in tort; and

• •  statutory claims, ie claims that arise out of legislation which might bind the parties, such as securities and antitrust legislation.²³

In all three categories of claim it is essential that a determination is made as to whether a particular claim or defence has sufficient connection with the contract to be covered by the arbitration agreement.²⁴

7.09  The model clauses recommended by the various arbitration institutions have an expansive effect on parties’ consent to arbitration. Indeed, with the broad wording parties agree that a bigger number of disputes fall within the scope of the arbitration agreement. However, as consent is given before disputes break out, there is at the same time a reduction in the pure consensual character of arbitration. This leads to a phenomenon which could be highlighted as the ‘paradox of consent’: the expansion of parties’ consent to arbitration causes a reduction in the pure consensual character of arbitration itself.

7.10  On the other hand narrower language will result in certain disputes falling outside the scope of the arbitration clause, and, accordingly, claims in tort or other non-contractual claims have been held not to arise under ‘an agreement’ and are not covered by an arbitration clause.²⁵ In a context where the selection of arbitration is no longer seen as the exclusion of a national forum, but rather the natural forum for international disputes,²⁶ this should be avoided, as before the dispute breaks out the parties might have consented to submit future disputes to arbitration. Indeed, it can also be observed that the reduction of the pure consensual character of arbitration goes hand in hand with the growing acceptance of arbitration as a mechanism to solve international disputes.

7.11  Doubt has also been cast on whether arbitration (like court proceedings) needs to be contentious by pointing out that neither arbitrators nor courts are necessarily called upon to decide disputes in the strict sense, but to regulate relationships between parties, notably by adapting a contract or filling gaps therein.²⁷ However, clear and express wording should be used if parties want to entrust the arbitral tribunal with the task of gap-filling and adaptation of the contract—particularly given the creative, as opposed to judicial, nature of this task.²⁸

7.12  Set-off is a complex institution giving rise to several questions of jurisdiction and applicable law in international relations.²⁹ One of the difficulties of set-off in private international law is the result of the lack of uniformity of the national laws governing it, which concerns not only the (p. 122) manner in how it is regulated, but also its very nature.³⁰ When claims of money are at stake, which is often the case in international commercial arbitration, set-off and counterclaim are ‘only a hair’s breadth away’³¹ from each other.³² Set-off in international commercial arbitration is therefore sometimes regarded as a ‘counterclaim in disguise’;³³ the reason for this similarity is that both set-off and counterclaim are meant to avoid circuity of action.³⁴ Moreover, in some jurisdictions, counterclaim and set-off are closely intertwined.³⁵ However, in spite of these similarities, set-off and counterclaim have to be distinguished sharply from each other, as a number of general characteristics differentiate set-off from counterclaim.³⁶ Set-off can be used merely ‘as a shield, not as a sword’.³⁷ Conversely a counterclaim is an independent claim raised by the defending party in judicial proceedings.³⁸

7.13  There are cases in which a respondent party will seek to introduce a counterclaim or raise a set-off against the claim. In general, this is possible provided the counterclaim or set-off relates to the same contract as the main claim.³⁹ On the other hand, the problem arises where a respondent wishes to counterclaim or raise a set-off arising under a different contract between the same parties, because in this situation the counterclaim or set-off is not covered by the arbitration agreement, and, as a consequence, the arbitral tribunal does not have jurisdiction to deal with the counterclaims and set-off claims.⁴⁰ Although the situation may be different if the contracts underlying the main claims and on which the counterclaims and set-off are based are closely related and form part of the same economic venture,⁴¹ the existence of a separate arbitration or choice of forum clause is, generally, considered to exclude the possibility of a set-off.⁴²

7.14  With regard to the UNCITRAL Arbitration Rules the Working Group agreed that the original provision as contained in Article 19(3) of the UNCITRAL Arbitration Rules (1996) should be extended beyond the contract from which the principal claim arose and apply to a wider range of circumstances.⁴³ Article 21(3) of the UNCITRAL Arbitration Rules (2010) now speaks of the possibility that the respondent ‘may make a counterclaim or rely on a claim for the purpose of set off provided that the tribunal has jurisdiction over it’.⁴⁴

7.15  A set-off of a claim from a different contract is also possible if the chosen arbitration rules allow a set-off to be raised.⁴⁵ However, while most arbitration rules contain provisions on (p. 123) counterclaims,⁴⁶ only some of them deal with set-off⁴⁷—even though both institutions have a striking resemblance.⁴⁸

7.16  A set-off claim is a purely defensive claim which may not exceed the amount originally claimed.⁴⁹ Issues of jurisdiction over set-off can arise both before an arbitral tribunal, where the set-off claim is not covered by the arbitration agreement, and, conversely, before a national court, where such a claim is validly submitted to arbitration.⁵⁰ Both cases concern the scope of the arbitration agreement.⁵¹ In determining the procedural admissibility of a set-off defence international arbitrators may be confronted with two different situations.⁵²

7.17  The basic procedural prerequisite⁵³ of set-off in this scenario—the most commonly encountered form of set-off in practice⁵⁴—is derived from the consensual character of arbitration: the cross-claim has to be within the scope of the arbitration agreement.⁵⁵ This basic rule prevents the respondent from enlarging the arbitrators’ jurisdiction unilaterally by simply raising the defence of set-off.⁵⁶ On the other hand, if the arbitration agreement does not cover the cross-claim, the parties may agree to extend the scope of the arbitration agreement.⁵⁷ Such an agreement may also be effected impliedly if the claimant does not object to the setting off of a cross-claim that lies outside the scope of the arbitration agreement.⁵⁸

7.18  There are precedents in international case law where the respondent has based his set-off defence on a cross-claim that arose out of a contract closely linked to the one in dispute.⁵⁹ Although the extremely close connection between the contracts may make it easy for the tribunal to confirm the admissibility of the set-off, nevertheless, not infrequently the question arises in arbitral practice as to whether an arbitration agreement contained in one contract extends to related contracts.⁶⁰ No general solution can be given for these cases and the answer always depends on the circumstances of the case, particularly on the wording of the arbitration (p. 124) agreement in the main contract and on the attitude of the applicable law towards the interpretation of arbitration agreements.⁶¹

7.19  Although there is a growing tendency to assume that, as a rule, an international arbitral tribunal has jurisdiction to hear a set-off defence based on a cross-claim that is subject to a different arbitration agreement or jurisdiction clause, this view applies only to those set-offs that have a substantive nature.⁶² Indeed, being a substantive defence which denies the existence of the claim, set-off has the same quality as any other substantive defence.⁶³ The tribunal should therefore be authorized to decide on all defences which are raised against the claim (‘le juge de l’action est le juge de l’exception’⁶⁴), and consequently also on the merits of the set-off.⁶⁵ Referring the cross-claim to adjudication before the domestic court is regarded as ‘depriving the set-off of its efficiency, especially when regarded as an essentially dilatory means’.⁶⁶ Therefore, conflicting arbitral or forum selection clauses relating to the cross-claim are not, per se, a bar to set-off.⁶⁷

7.20  While the simultaneous adjudication of claim and cross-claim through the set-off defence is alleged to be in the presumed interest of the parties to the arbitration,⁶⁸ taking a purely pragmatic approach to this problem neglects the will of the parties as expressed in the arbitration or other forum selection clause covering the cross-claim.⁶⁹ Indeed, the arbitrators have to determine the will of the parties at the moment of conclusion of the arbitration agreement, covering the main claim on the one hand and the different forum clause covering the cross-claim on the other.⁷⁰ From this ex ante perspective both the consensual nature of arbitration and the function and nature of forum selection clauses puts into question the admissibility of set-off in international arbitrations.⁷¹

7.21  When concluding the arbitration clause on which the arbitral proceedings are based, the parties intended to have those, and only those, claims decided by the arbitral tribunal which fall under the scope of the arbitration agreement.⁷² To extend the proceedings beyond the arbitration agreement without any indication as to the corresponding will of the parties would be against the parties’ original intentions.⁷³ Moreover, when the cross-claim is not subject to another arbitration agreement but to a jurisdiction clause and the claimant opposes the tribunal’s competence to hear the set-off, one has to take account not only of the parties’ intentions that underlie the arbitration agreement but also of their will as expressed in the other forum selection clause.⁷⁴

(p. 125) 7.22  An easy way to solve that problem is certainly to expand the parties’ consent to allow the arbitrators to deal with any counterclaim for the purposes of a set-off.⁷⁵ That is the option taken by Article 21(5) of the Swiss Rules. However, as noted by Schöll, this provision does not mean that a set-off defence should be allowed regardless of the law applicable to it, but it has to be understood in the sense that, if the substantive law requirements for set-off are met, the arbitral tribunal can entertain the defence even if it would normally have no jurisdiction on the defendant’s claim, and even if the parties agreed, in respect of that claim, on another dispute settlement mechanism.⁷⁶

7.23  Some scholars⁷⁷ also establish a presumption according to which, by entering into an arbitration agreement, the claimant accepts that the arbitrators’ jurisdiction will be extended to any claim used by the defendant as a basis for a set-off defence.⁷⁸ Poudret submits that the claimant should be considered as having implicitly accepted such an extension of the arbitral tribunal’s jurisdiction.⁷⁹ Schöll posits that such a presumption should be based on an analysis of the contractual situation in the particular case, rather than on the general assumption that, by entering into arbitration, a party accepts that the arbitral tribunal will deal with any set-off defence that might come onto the table.⁸⁰

7.24  A counterclaim is a separate claim which can remain valid even if the original claim has been dismissed.⁸¹ A counterclaim—primarily a measure of procedural economy—makes it possible for the parties to litigate all disputes existing at the time the main claim is brought forward in the same proceeding before the same tribunal.⁸² Despite its practical importance, the question of the admissibility of counterclaims before an arbitral tribunal is not mentioned in many national arbitration laws.⁸³ However, it is generally accepted that Article 23 of the UNCITRAL Model Law with the heading ‘Statements of claim and defence’ applies by analogy to counterclaims and set-offs.⁸⁴

7.25  Counterclaims (like set-off defences) do not give rise to any problems of jurisdiction as long as the counterclaim is subject to the same arbitration agreement as the main claim, whereas when the counterclaim is based on a legal relationship which is not within the objective scope of the arbitration agreement that covers the main claim, similar issues arise—as in the case of set-off defences.⁸⁵

7.26  The arbitration rules do not usually contain restrictions on the admissibility of counterclaims raised in the statement of defence.⁸⁶ In the absence of a particular rule in the national arbitration laws, the arbitration rules or the chosen procedural rules, the arbitral tribunal may freely determine the admissibility of counterclaims by virtue of its power to determine (p. 126) the arbitral proceedings.⁸⁷ The counterclaims must fall under an arbitration agreement between the parties,⁸⁸ although not necessarily that upon which the jurisdiction of the arbitral tribunal over the principal claims is based.⁸⁹ In the latter case, however, the admissibility of the counterclaim presupposes that the modalities of arbitration pursuant to both agreements are compatible.⁹⁰

7.27  Where an issue arises concerning the validity, existence or scope of the arbitration agreement, courts and arbitral tribunals will have to interpret the parties’ intention.⁹¹ The arbitration agreement is a contract, and courts and arbitral tribunals will apply the general principles of contractual interpretation. However, due to the fact that arbitration agreements oust national courts but also because of the evolution of the acceptance of arbitration as a dispute resolution mechanism, courts and arbitral tribunals have not always interpreted them in a neutral way.

7.28  Arbitration agreements are, in general, subject to the same type of rules of interpretation as all other contracts, and all relevant circumstances have to be taken into account.⁹² Several principles of interpretation might be applied for interpreting parties’ consent.

7.29  The first and most widely accepted principle of interpretation applied to arbitration agreements is the principle of interpretation in good faith; this rule of interpretation means that a party’s true intention should always prevail over its declared intention—where the two are not the same.⁹³ Thus, declarations should be interpreted in good faith and the parties’ conduct considered, both at the time of contracting and subsequently.⁹⁴

7.30  From this broad rule—that contracts must be interpreted in good faith—more specific rules of interpretation can be derived, all of which stem from the need to establish the actual intention of the parties:

• •  first, the intention of the parties must be examined in context, that is to say, by taking into account the consequences which the parties reasonably and legitimately envisaged;

• •  secondly, the attitude of the parties after the signature of the contract and up until the time when the dispute arose should be taken into account, as that attitude will indicate how the parties themselves actually perceived the agreements in dispute.⁹⁵ This rule is sometimes referred to as ‘practical and quasi-authentic interpretation’ or ‘contemporary practical interpretation’ and is usually applied in arbitral case law.⁹⁶ In particular, recognition of the existence of an arbitration agreement will frequently result from a party initially relying on (p. 127) the existence of that agreement to avoid the jurisdiction of the courts, but subsequently denying its existence or validity before an arbitral tribunal;⁹⁷

• •  thirdly, and finally, the agreement must be interpreted as a whole.⁹⁸ The need for an interpretation of the agreement or of its various constituent parts as a whole, bound together by the true intention of the parties, is one of the factors to be taken into account in disputes involving the construction of arbitration agreements contained in related contracts.⁹⁹

7.31  A second principle when interpreting of arbitration agreements is the principle of effective interpretation. This common-sense rule whereby, if in doubt, one should ‘prefer the interpretation which gives meaning to the words, rather than that which renders them useless or nonsensical’,¹⁰⁰ is widely accepted not only by the courts but by arbitrators who readily acknowledge it to be a ‘universally recognized rule of interpretation’.¹⁰¹

7.32  The principle of effective interpretation has, for instance, been applied by the Swiss Federal Tribunal in its decision 130 III 66 where it held that, when it is clear that the parties wanted to oust national courts in favour of arbitration, the arbitration agreement should be interpreted in accordance with the principle of effective interpretation so as to uphold the arbitration agreement.¹⁰²

7.34  The third major principle of interpretation, less frequently encountered in arbitral case law but widely recognized in comparative law, is the principle that the agreement should be interpreted contra proferentem, or against the party that drafted the clause in dispute.¹⁰⁴ Indeed, it is not unusual to find that one party has simply signed contractual documents drafted by the other party,¹⁰⁵ and that a question has subsequently arisen as to whether various provisions of that contract constitute an arbitration agreement or, more commonly, as to the scope of that arbitration agreement.¹⁰⁶

7.35  If the arbitration agreement is based on the standard conditions of one party the other party can rely on existing uncertainties as to the scope of the arbitration agreement to resist (p. 128) applications for referral to arbitration or court proceedings.¹⁰⁷ On the other hand, in such cases, it is perfectly reasonable that the party responsible for drafting the ambiguous or obscure text should not be entitled to rely on that ambiguity or obscurity (in claiming, for example, that a particular disputed matter is not covered) and the agreement should be interpreted contra proferentem.¹⁰⁸

7.36  Arbitration agreements oust national courts. Therefore in the past courts and arbitral tribunals have interpreted arbitration agreements in a restrictive way. Nowadays rather the opposite view prevails and courts and arbitral tribunals have adopted a pro-arbitration policy. However, it might be argued that arbitration agreements, like any other contract, should be interpreted in a neutral way.

7.37  In older awards the jurisdictional effect of arbitration agreements sometimes led to a restrictive interpretation, as they were seen as a renunciation of the constitutional right to have a dispute decided by the courts.¹⁰⁹ The same position has also been adopted in courts’ judgments.¹¹⁰ A restrictive interpretation is, however, not justified in international arbitration, given that this mode of dispute resolution in many cases offers the parties better guarantees of neutrality and efficiency than proceedings before national courts.¹¹¹

7.38  Interpretation must not be restrictive where it is the subject matter and ambit of arbitration agreement which is at issue, not the valid conclusion.¹¹² In the Sonatrach case¹¹³ the Swiss Federal Tribunal held that while the existence of an arbitration agreement should not be assumed too lightly, once it has been established that an arbitration agreement has been concluded, there is no reason to interpret it restrictively. On the contrary the court should assume that, in deciding to arbitrate, the parties intended to confer wide powers upon the arbitral tribunal.¹¹⁴

7.39  In today’s arbitration-friendly climate the opposite view prevails. While, in particular, the US courts have consistently held that arbitration agreements must be interpreted in favour of arbitration,¹¹⁵ comparable views can be found in most countries which have adopted a pro-arbitration policy.¹¹⁶ However, the other national arbitration regimes taking a pro-arbitration approach, usually do it without the same strong presumption in favour of arbitration that US courts apply.¹¹⁷

(p. 129) 7.40  Yet the ‘pro-arbitration’ rule of interpretation adopted in the United States¹¹⁸ and in Switzerland¹¹⁹ applies only to interpreting the scope of an existing arbitration agreement, and not to determining whether a valid arbitration agreement exists.¹²⁰

7.41  English courts have recently abandoned traditional, sometimes restrictive, modes of construction. In the words of a 2007 English Court of Appeal decision in Fiona Trust & Holding Corp v Privalov, affirmed by the House of Lords, ‘any jurisdiction or arbitration clause in an international commercial contract should be liberally construed’.¹²¹

7.42  It has been observed that this rule can only apply once it has been ascertained that the parties actually agreed on arbitration, whilst, on the other hand, in cases where the main issue is whether the parties agreed to arbitration at all there is no justification for such an interpretive rule in favour of arbitration.¹²² Indeed, although it is the primary mode of dispute settlement in international business, every party has a legitimate and constitutional right to choose to have its rights determined by the national courts.¹²³

7.43  Arbitration agreements should be interpreted in a neutral way, (neither restrictively nor extensively), not only with regard to their validity, but also with respect to their scope. In fact, with regard to consent to arbitration, not only the question of whether the parties prefer arbitration over national courts as a dispute resolution mechanism is important, but also the extent of what is covered by the parties’ consent to arbitration. Both these aspects are equally important when considering the rather jurisdictional side of an arbitration agreement.

7.44  While English courts have more recently adopted a fundamentally different approach, embracing a pro-arbitration rule of interpretation of the scope of arbitration agreements in international commercial transactions,¹²⁴ in the past English courts did not appear to rely on either ‘pro-arbitration’ or ‘anti-arbitration’ presumptions, but rather placed significant emphasis on the precise wording of arbitration clauses, drawing relatively fine distinctions between slightly different verbal formulae.¹²⁵

7.45  A neutral interpretation acquires even more importance with the gradually diminishing significance of the formal requirements of arbitration agreements. However, national arbitration laws may clearly provide for in favorem validitatis provisions to, whenever possible, uphold the validity of the arbitration agreement.¹²⁶

7.46  The expression ‘pathological clause’¹²⁷ denotes arbitration agreements, and particularly arbitration clauses, which contain a defect or defects liable to disrupt the smooth progress of (p. 130) the arbitration.¹²⁸ Arbitration agreements can be pathological for a variety of reasons.¹²⁹ One reason may be that it is not clear whether the parties have consented to arbitration or not.

7.47  Some arbitration clauses use permissive language, for instance only providing the parties with an option to choose arbitration.¹³⁰ Moreover, although it is not necessary that the clause uses the term arbitration or expressly states that the decision rendered should be final and binding,¹³¹ ambiguity can also arise where it is not conclusive from the arbitration clause whether the parties actually agreed on arbitration or some other form of dispute resolution, such as expert determination.¹³²

7.48  Pathological clauses will need to be interpreted by the arbitrators, and by the courts reviewing the existence of an arbitration agreement and ensuring that the arbitrators remained within the bounds of their jurisdiction.¹³³ As a general rule national courts and arbitral tribunals seek to interpret arbitration clauses positively.¹³⁴ Indeed, in most cases, the arbitrators or the courts—relying on the principle of effective interpretation more than on any rule in favorem validitatis¹³⁵—will salvage the arbitration clause by restoring the true intention of the parties.¹³⁶