In procurement, an arbitration clause often receives less attention than price, liability, warranty, payment terms or delivery conditions. That is understandable: when a supplier agreement is negotiated, nobody expects the relationship to end in a serious dispute.
But the arbitration clause determines something very important before that dispute ever occurs: where, how and under which procedural framework a dispute will be resolved.
For a tactical buyer, arbitration is therefore not primarily a legal theory. It is a commercial risk allocation decision. The buyer does not need to become an arbitration lawyer, but should understand what the clause does, which commercial decisions are hidden inside it, and when Corporate Legal should become involved.
This article uses the SCC Arbitration Institute and its current arbitration framework as the main reference.
LHTS framework
Role: Tactical buyer
Process: Sourcing process — negotiation and contracting, followed by contract management
Level: Advanced
Quick answer: what does a buyer need to know about an arbitration clause?
An arbitration clause determines how contractual disputes will be resolved outside the ordinary court system.
When SCC arbitration is selected, the contract should make the dispute-resolution mechanism clear. SCC’s recommended model clauses address the applicable SCC rules and recommend that the parties also specify the seat of arbitration, language of the proceedings and substantive law governing the contract. SCC also offers clauses for expedited arbitration and combined solutions.
From a procurement perspective, the important question is therefore not simply:
“Should we accept arbitration?”
It is:
“What dispute-resolution mechanism fits the value, complexity, international exposure and risk profile of this supplier relationship?”
What is arbitration?
Arbitration is a private method of resolving disputes. Instead of asking a national court to decide the dispute, the parties agree that one or more arbitrators will determine it.
The parties usually make that decision when negotiating the original contract, long before any dispute exists.
That makes the arbitration clause different from many other contractual provisions. A buyer may negotiate price adjustments every year or update delivery schedules every month. The dispute clause may remain untouched for ten years — and then suddenly become one of the most important provisions in the contract.
An arbitral award is normally final and binding. There is generally no ordinary appeal on the merits comparable with normal court proceedings, although applicable arbitration law may provide limited grounds for challenging or setting aside an award.
For international supplier relationships, enforceability is one reason arbitration is often considered. SCC notes that arbitral awards benefit from the international enforcement framework created by the New York Convention.
Why arbitration matters to procurement
Dispute resolution affects the commercial risk of a supply agreement.
Imagine a strategically important supplier located in another country. The agreement covers tooling, intellectual property, long lead-time components and several million euros of annual spend.
If something goes seriously wrong, the buyer may need to answer questions such as:
- Which country’s courts would otherwise have jurisdiction?
- Which law governs the agreement?
- Can the dispute be handled in English?
- Could urgent interim measures be obtained?
- How long could the process take?
- Who decides the dispute?
- Can the resulting decision be enforced where the supplier has assets?
These questions explain why dispute resolution belongs in the commercial contracting process rather than being treated as legal boilerplate.
Corporate Legal reflection: Procurement should own the commercial context while Legal owns the legal assessment. The buyer can explain supplier geography, contract value, operational dependency, likely dispute scenarios and negotiation leverage. Legal can then assess whether the proposed dispute mechanism protects the company appropriately.
Using the SCC Arbitration Institute
The SCC Arbitration Institute administers both domestic and international commercial disputes.
Its 2025 statistics illustrate that arbitration is not limited to exceptional corporate transactions. SCC registered 213 new cases during 2025, and purchase agreements were among the common contract types giving rise to disputes. Half of the cases involved international disputes.
For a procurement professional, there are two SCC procedures particularly worth understanding: ordinary arbitration under the SCC Arbitration Rules and expedited arbitration under the SCC Rules for Expedited Arbitrations.
Ordinary SCC arbitration versus expedited arbitration
Standard SCC arbitration provides greater procedural capacity for larger or more complex disputes.
Expedited arbitration is intended for less complex disputes. Under the expedited procedure there is a sole arbitrator, shorter deadlines and restrictions designed to simplify the proceeding. SCC states that an award should generally be issued within three months, although actual duration depends on the case.
The difference is commercially relevant.
SCC’s 2025 statistics show an average of approximately 13.6 months from referral to award for cases concluded under the ordinary Arbitration Rules, compared with approximately 3.7 months under the Expedited Arbitration Rules. Those numbers describe SCC’s 2025 caseload rather than a guaranteed timetable for any particular dispute.
SCC also publishes combined model clauses. These can allow expedited arbitration to apply initially while giving the SCC a mechanism to apply the ordinary Arbitration Rules when complexity, value or other circumstances justify it. SCC additionally publishes a value-based combined-clause alternative.
Corporate Legal reflection: Avoid creating an arbitrary financial threshold simply because it appears commercially convenient. A EUR 500,000 intellectual-property dispute can be more complex than a EUR 5 million unpaid-invoice claim. Legal should consider value together with complexity, evidence, jurisdictions involved and the types of remedies that may be required.
The five decisions hidden inside an arbitration clause
A buyer should be able to recognize five separate decisions.
1. Which arbitration rules apply?
The contract must clearly identify the chosen arbitration mechanism.
For SCC arbitration, SCC recommends using its model wording rather than inventing institutional wording from scratch. Current SCC model clauses cover ordinary arbitration, expedited arbitration and combined approaches.
For procurement, this matters particularly when suppliers propose their own Terms and Conditions. Changing a few words in a dispute clause can unintentionally change the institution, procedure or jurisdiction.
Corporate Legal reflection: Be cautious with hybrid clauses assembled from several templates. Combining elements from SCC, ICC, national courts and supplier wording can create ambiguity exactly when the clause needs to be clearest.
2. What is the seat of arbitration?
The seat is the legal home of the arbitration.
It is not necessarily the physical location of the hearing.
Under the SCC Rules, hearings may be held elsewhere while the arbitration is still legally deemed to have taken place at the agreed seat. If the parties have not agreed the seat, the SCC Board decides it.
This distinction is important for buyers negotiating international contracts. “We can hold the meeting in Copenhagen” is not the same decision as “the seat of arbitration is Copenhagen.”
The seat connects the arbitration to the applicable arbitration law and the courts that exercise supervisory functions over the arbitration.
Corporate Legal reflection: Seat selection is a legal decision with consequences beyond travel convenience. Avoid negotiating it purely as a geographic compromise between buyer and supplier.
3. Which substantive law governs the contract?
The governing law determines the legal rules used to interpret the contract and decide the substantive dispute.
This is different from the seat.
A contract can, for example, choose Swedish substantive law and Stockholm as the seat, but the two concepts should still be understood separately.
Under the SCC Arbitration Rules, the tribunal decides the merits using the law or rules of law selected by the parties. If the parties have made no selection, the tribunal applies the law or rules of law it considers most appropriate.
For procurement, governing law should therefore be addressed when the contract is negotiated rather than left unintentionally open.
4. Which language will be used?
Language can have a direct impact on cost and operational efficiency.
If the contract, technical specifications, correspondence, quality records and project documentation are predominantly in English, choosing another language for the dispute may create substantial translation work.
The SCC Rules allow the tribunal to determine the language if the parties have not already agreed it.
The commercial lesson is simple: decide deliberately.
5. How confidential should the dispute be?
Confidentiality requires particular attention.
Article 3 of the SCC Arbitration Rules states that the SCC, the arbitral tribunal and any administrative secretary must maintain confidentiality unless otherwise agreed by the parties. The rule does not express the same confidentiality obligation for the disputing parties themselves.
That distinction is important for procurement contracts involving trade secrets, pricing, intellectual property, product development, customer information or sensitive supplier data.
Corporate Legal reflection: If confidentiality between the parties is commercially important, do not assume that choosing arbitration automatically solves the issue. Legal should determine whether an express confidentiality obligation should be included and what exceptions are required for auditors, insurers, regulators, group companies, financing parties or enforcement proceedings.
Arbitration does not mean that courts completely disappear
Buyers sometimes understand arbitration as meaning that national courts can never become involved.
That is too simple.
The SCC Arbitration Rules permit the tribunal to grant interim measures. They also state that requesting interim measures from a judicial authority is not incompatible with the arbitration agreement. SCC additionally provides an Emergency Arbitrator procedure for urgent measures before the ordinary tribunal is in place.
This can matter in procurement when urgent action is required—for example to protect confidential information, preserve assets or prevent an action that could cause immediate commercial damage.
Corporate Legal reflection: Interim-relief requirements can be business-critical. Consider likely emergency scenarios before the dispute arises, particularly in technology, IP-intensive, tooling, exclusivity and critical-supply agreements.
What does arbitration cost?
A common assumption is that arbitration is either automatically cheaper or automatically more expensive than court litigation.
Neither assumption is particularly useful.
Cost depends on the dispute, value, number of arbitrators, procedural complexity, evidence, experts and legal representation.
SCC’s analysis of 221 awards rendered between 2015 and 2022 found that legal representation was the dominant cost component, accounting for more than 90% of total costs in most of the cases analysed. The institutional and tribunal fees were a much smaller part of the overall cost.
For procurement, this leads to an important conclusion: selecting an efficient procedure is not only about negotiating the SCC fee structure. Complexity in the contract and the dispute itself can drive external legal cost.
A well-structured contract, clear specifications, documented changes, disciplined contract management and good supplier records can therefore have value long before an arbitration ever begins.
A procurement checklist before accepting an arbitration clause
Before accepting or changing the dispute-resolution clause, the tactical buyer should be able to answer:
- Which arbitration institution and rules are proposed?
- Is ordinary or expedited arbitration appropriate for the contract’s value and complexity?
- What is the proposed seat?
- Which substantive law governs the agreement?
- Which language will be used?
- Is confidentiality between the parties sufficiently addressed?
- Are urgent interim measures potentially important for this category or supplier relationship?
- Has Corporate Legal reviewed material deviations from the company’s approved contract position?
The objective is not for procurement to make every legal decision. The objective is for procurement to recognize the commercial consequences early enough for the right decision to be made.
How this connects to the tactical buyer role
The arbitration clause primarily belongs to the tactical procurement role because the tactical buyer negotiates the commercial framework governing the supplier relationship.
The buyer must understand which contractual positions can be negotiated independently, which require internal approval and which require specialist legal input.
That ability becomes particularly important in international sourcing, strategic supplier agreements, intellectual-property-intensive purchases and contracts with high switching costs.
The buyer becomes the bridge between business requirements and legal risk management.
Where arbitration fits in the procurement process
In the LHTS sourcing process, the topic becomes particularly relevant when preparing contractual requirements and during the stage where the buyer sends the RFQ, negotiates and contracts the supplier.
The dispute-resolution framework should ideally be part of the contractual package sent to bidders. Introducing it only after commercial negotiations are otherwise complete can unnecessarily reopen negotiations.
It also remains relevant during contract management. Good documentation of changes, claims, notices, performance problems and commercial decisions is essential if a disagreement develops into a formal dispute.
The LHTS Sourcing Process 2b course connects the contracting stage with implementation and contract management, making it a useful foundation for understanding where contract clauses enter the sourcing workflow.
Common mistakes buyers should avoid
One mistake is treating the arbitration clause as boilerplate and accepting the supplier’s wording without understanding what changed.
Another is confusing the arbitral institution with the seat. Choosing SCC does not by itself explain every procedural and legal element of the arbitration.
A third mistake is assuming that arbitration automatically makes everything confidential. The confidentiality position should be examined rather than assumed.
A fourth is automatically specifying three arbitrators because the contract value is large. More arbitrators can increase cost, while the appropriate structure also depends on complexity and risk.
Another common error is focusing only on dispute value. The consequences of a dispute involving IP ownership, production tooling, exclusivity or supply interruption may be much greater than the monetary claim visible at the outset.
Finally, avoid rewriting an established arbitration model clause simply to make it sound more complete. More wording is not always better wording.
Corporate Legal reflection: A short, tested institutional clause plus carefully selected commercial parameters is often preferable to a lengthy bespoke procedure drafted during a sourcing negotiation. Every additional procedural provision creates another interaction that may have to be interpreted later.
Should buyers copy SCC’s model arbitration clause?
The SCC publishes recommended dispute-resolution clauses, and they should be the starting reference when SCC arbitration is intended. The current SCC model structure refers disputes to the applicable SCC rules and recommends addressing seat, language and substantive governing law.
A buyer should understand the structure but should not independently modify an approved corporate arbitration clause for a material agreement without involving the relevant legal function.
Procurement’s role is to identify the commercial requirement and understand the negotiation consequence.
Legal’s role is to ensure that the resulting clause works legally.
Related LHTS learning
This topic belongs naturally in the advanced tactical-buyer learning path because arbitration combines sourcing, contracting, risk allocation and cross-functional collaboration.
For buyers building the foundation first, Sourcing Process 2b explains the sourcing steps covering RFQ, negotiation, supplier contracting, implementation and contract management.
FAQ: arbitration clauses in procurement contracts
Is arbitration always better than going to court?
No. Arbitration and litigation have different advantages, costs and procedural characteristics. The appropriate mechanism depends on the contract, jurisdictions, value, complexity, enforcement requirements and commercial risks involved.
Is SCC arbitration confidential?
The SCC Arbitration Rules impose confidentiality obligations on the SCC, tribunal and administrative secretary. Buyers should not automatically assume that this creates a complete contractual confidentiality obligation between the parties.
What is the difference between the seat and the hearing location?
The seat is the legal place of the arbitration. Hearings can take place somewhere else without changing the legal seat. The SCC Rules expressly recognize this distinction.
What is expedited SCC arbitration?
It is a simplified SCC arbitration procedure intended for less complex disputes, using a sole arbitrator and shorter procedural timelines.
Should the buyer choose the governing law?
The buyer should understand its commercial implications, but the choice of governing law should normally follow the company’s contracting policy and appropriate Legal review, particularly in cross-border contracts.
Can a party request urgent protection before the arbitration is complete?
Yes. The SCC framework provides mechanisms for interim measures and Emergency Arbitrator proceedings, while a request to a competent court for interim measures is not automatically incompatible with SCC arbitration.
Conclusion: understand the clause before you negotiate it
An arbitration clause may occupy only a few lines of a procurement contract, but those lines establish the framework for resolving the most serious disagreements that can arise from the supplier relationship.
An advanced tactical buyer should therefore understand the commercial questions behind the clause: rules, seat, governing law, language, confidentiality, procedure, cost and enforceability.
The buyer does not replace Corporate Legal.
The buyer makes Legal more effective by identifying the commercial context, supplier risk and negotiation consequences before the contract is signed.
When SCC arbitration is selected, start with the current model clauses published by the SCC Arbitration Institute and treat deviations as deliberate contractual decisions rather than boilerplate editing.
That is the practical procurement skill: know what you are agreeing to before the dispute exists.