What Happens if Your International Arbitration Clause is Flawed? Lessons from the Astra Footwear Industry Case

The arbitration clause: often a few short paragraphs in a lengthy international contract, yet it holds the power to dictate how and where disputes worth millions, or even billions, are resolved. Despite its critical importance, the arbitration clause is sometimes hastily drafted or overlooked, leading to what are termed "pathological clauses"—clauses so flawed they can create more conflict than they resolve. Such defects can lead to costly preliminary battles over jurisdiction, delays, and in worst-case scenarios, the complete frustration of the parties' intent to arbitrate.

The U.S. District Court for the Southern District of New York's decision in Astra Footwear Industry v. Harwyn International, Inc., dated January 11, 1978, though decades old, remains a salient illustration of the problems arising from an imperfectly drafted arbitration clause and the approach U.S. courts may take to salvage the core agreement to arbitrate.

I. The Anatomy of a Flawed Clause: The Astra Footwear Scenario

The underlying dispute in Astra Footwear was a straightforward commercial one. In May 1975, Astra Footwear Industry, a Yugoslavian shoe manufacturer, entered into a contract to sell 13,400 pairs of shoes to Harwyn International Inc., a New York-based shoe distributor. When Harwyn allegedly failed to pay approximately $115,820 due under the contract, Astra sought to resolve the matter through arbitration, as stipulated in their agreement.

The arbitration clause itself was a "cross-clause" type, where the forum depended on which party initiated proceedings. Crucially for this case, it stated that if the seller (Astra) pursued a claim against the buyer (Harwyn), the dispute would be settled by arbitration at "the Chamber of Commerce in New York." If the buyer initiated proceedings, the forum was to be the Yugoslav Chamber of Commerce in Belgrade.

Astra's troubles began when it attempted to initiate arbitration.

1. Astra first approached the New York Chamber of Commerce and Industry (NYCCI). However, NYCCI informed Astra that it had discontinued its arbitration services.
2. Undeterred, Astra then turned to the International Chamber of Commerce (ICC), arguing that its New York presence meant it was the "Chamber of Commerce in New York" referred to in the contract. The ICC declined to administer the arbitration, reasoning that the clause did not clearly designate the ICC and, significantly, Harwyn did not consent to ICC arbitration.

Facing these roadblocks, Astra petitioned the U.S. District Court for the Southern District of New York, seeking an order to compel Harwyn to arbitrate, preferably before the ICC, or alternatively, before any arbitrator or institution the court deemed appropriate, including the American Arbitration Association (AAA).

II. When the Chosen Path is Blocked: Arguments Before the Court

Harwyn resisted arbitration, raising several arguments based on the flawed designation:

• Intended Institution: Harwyn contended that "the Chamber of Commerce in New York" referred to the New York Chamber of Commerce (NYCC), which was a predecessor to the NYCCI. Harwyn asserted this was a deliberate choice, made because this was its first business engagement with a company from a communist nation, and it had selected the NYCC specifically to safeguard its interests.
• Impossibility: Harwyn pointed out that the NYCC had merged to become the NYCCI in 1973 and, crucially, had ceased to offer arbitration services at that time—before the contract with Astra was even signed in 1975. Therefore, arbitration before the intended (or its successor) institution was impossible.
• Nullity of the Agreement: Harwyn argued that the designation of the NYCC (via NYCCI) was an integral and fundamental part of the arbitration agreement. Since this chosen mechanism had failed or was unavailable, the entire arbitration agreement should be considered void.

Astra countered that even if the NYCCI was the intended forum and was unavailable, the overarching agreement to arbitrate disputes should not be invalidated. Astra invoked Section 5 of the U.S. Federal Arbitration Act (FAA), arguing that a "lapse in the naming of an arbitrator" had occurred, and the court therefore had the authority and duty to appoint an arbitrator to allow the arbitration to proceed.

III. The Court's Intervention: Upholding the Intent to Arbitrate

Judge Pierce, presiding over the case in the Southern District of New York, delivered a ruling that underscored the strong U.S. federal policy in favor of arbitration.

1. Acknowledging the Core Intent:
The court began by affirming that, notwithstanding the difficulties with the institutional designation, there was no doubt that both Astra and Harwyn had validly agreed to resolve their disputes through arbitration rather than litigation. This fundamental agreement to arbitrate formed the bedrock of the court's subsequent reasoning.

2. Interpreting the Ambiguous Designation:
The court then addressed which entity the phrase "the Chamber of Commerce in New York" was intended to mean. It sided with Harwyn's interpretation that the parties had the original New York Chamber of Commerce (NYCC) in mind, rather than the ICC's New York office. The court found support for this in Astra's own initial attempt to file with the NYCCI (the NYCC's successor) and the ICC's suggestion that Astra explore arbitration with the NYCC.

3. Addressing the Unavailability of the Chosen Institution – The Application of FAA §5:
This was the crux of the decision. The court confronted the fact that the intended arbitral body, the NYCC (and by extension its successor, NYCCI), was no longer available to conduct arbitrations. The key question was whether this rendered the arbitration agreement unenforceable, as Harwyn argued, or whether a judicial remedy was available, as Astra contended.

The court turned to Section 5 of the Federal Arbitration Act (9 U.S.C. §5). This provision states:
"If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator."

Judge Pierce reasoned that the unavailability of the NYCC/NYCCI for arbitration constituted "a lapse in the naming of an arbitrator or arbitrators" within the meaning of FAA §5. The court emphasized that the purpose of this statutory provision was precisely to address situations where the parties' chosen mechanism for initiating arbitration or appointing a tribunal fails, thereby preventing the frustration of their underlying agreement to arbitrate.

The decision also explicitly invoked the well-established U.S. federal policy favoring arbitration. This policy dictates that arbitration clauses should be interpreted flexibly and that any doubts concerning the scope of arbitrable issues, or the functionality of the arbitration agreement, should be resolved in favor of arbitration.

Outcome:
Based on this reasoning, the court granted Astra's petition to compel arbitration. While not compelling it before the ICC as Astra initially requested (given the interpretation that NYCC was intended), the court affirmed its power under FAA §5 to appoint an arbitrator since the parties' chosen mechanism had failed. The fundamental agreement to arbitrate was thus rescued from the defect in the institutional designation.

IV. Broader Lessons from Astra Footwear and the Principle of Judicial Support for Arbitration

The Astra Footwear decision, while specific to its facts and U.S. law, offers several enduring lessons for international businesses and their legal counsel:

A. The Primacy of the Intent to Arbitrate:
The case strongly illustrates that courts in arbitration-friendly jurisdictions will generally strive to uphold the parties' fundamental agreement to resolve disputes by arbitration, even if the specific mechanics outlined in the clause are defective. The core question often becomes: did the parties intend to arbitrate at all? If so, procedural deficiencies may be remediable. This judicial attitude is underpinned by the principle of separability (or severability), which treats the arbitration clause as a distinct agreement that can survive defects in, or even the invalidity of, the main contract. While the PDF summary of Astra Footwear doesn't explicitly mention separability in the context of the institutional choice, the court's willingness to look past the failure of that specific choice to the underlying agreement to arbitrate is consistent with this broader doctrine.

B. Consequences of Ambiguous or Failed Institutional Designations:
Astra Footwear highlights the direct consequences:

• Increased Costs and Delays: The parties had to resort to court proceedings simply to determine if and how arbitration could proceed, incurring legal fees and consuming valuable time before the merits of the $115,820 claim could even be addressed.
• Loss of Chosen Forum/Method: Astra did not get its preferred ICC arbitration. The parties ended up with a court-appointed arbitrator, which may not have been what either party envisioned when selecting "the Chamber of Commerce in New York."
• Risk of Invalidation: While the U.S. court, armed with FAA §5 and a strong pro-arbitration policy, salvaged the agreement, this outcome is not guaranteed in all jurisdictions. Courts in countries with less arbitration-friendly laws or without similar statutory "rescue" mechanisms might well have declared the entire arbitration agreement void due to the impossibility of performance as drafted. Some developing nations, for example, may take a stricter view on the precision required for institutional designation.

C. The Role of National Arbitration Laws as a "Safety Net":
Provisions like FAA §5 in the U.S., and analogous provisions in other modern arbitration statutes (many of which are based on the UNCITRAL Model Law, like Japan's 2003 Arbitration Law), serve as a judicial safety net. These laws empower courts to intervene constructively to overcome procedural impasses, such as a failure in the arbitrator appointment mechanism. For example, Article 11(3) and 11(4) of the UNCITRAL Model Law provide mechanisms for court assistance in the appointment of arbitrators if the parties' agreed procedure fails.

However, relying on courts to fix a defective clause is a fallback, not a strategy. The scope of judicial intervention varies by jurisdiction, and the process invariably involves additional expense and uncertainty.

D. Beyond Institutional Designation – Other Common "Pathologies":
The problem in Astra Footwear concerned a failed institutional designation. However, arbitration clauses can suffer from numerous other "pathologies" that can cripple their effectiveness. These include:

• Unclear Scope: Ambiguity as to which types of disputes are covered.
• Conflicting Methods: Mentioning arbitration alongside other methods like mediation or court litigation without a clear, mandatory hierarchy.
• Impracticable Procedures: Stipulating an unworkable number of arbitrators for the agreed appointment method, or impossible deadlines.
• Non-Existent Rules: Referencing rules of an institution that are no longer in force or never existed.
• Naming a Specific Arbitrator Who Becomes Unavailable: Without a fallback, this can be problematic.

V. Best Practices for Drafting to Avoid the Astra Footwear Predicament

The most effective way to avoid the delays, costs, and uncertainties exemplified by Astra Footwear is through meticulous and informed drafting of the arbitration clause.

1. Precision in Naming Institutions: Always use the full, correct, and current official name of the chosen arbitral institution. Most institutions publish model clauses that provide this exact wording. Verify this before finalizing the contract.
2. Confirm Institutional Capacity: Before designating an institution, ensure it is still active, handles the type of disputes anticipated, and is willing to administer cases under its rules or any mutually agreed procedural modifications.
3. Consider Fallback Mechanisms: For critical elements like institutional choice or the appointment of a specific arbitrator, consider including a fallback provision in the clause itself. For example: "If [Institution X] is unable or unwilling for any reason to administer the arbitration, the arbitration shall be administered by [Institution Y] in accordance with its rules."
4. Clarity in Appointment Procedures: Even when naming an institution with its own appointment rules, ensure any party-agreed modifications to those rules are clear and workable. If opting for ad hoc arbitration, the appointment mechanism needs to be particularly robust.
5. Regular Review of Standard Clauses: Business environments and institutional frameworks evolve. Companies should periodically review their standard contract templates, including arbitration clauses, to ensure they remain current and effective.
6. Consult with Experienced Counsel: Especially for high-value or complex international agreements, or when dealing with counterparties in unfamiliar jurisdictions, engaging legal counsel with specific expertise in international arbitration drafting is a prudent investment.

Conclusion

The Astra Footwear Industry v. Harwyn International, Inc. case, though a product of its time, serves as a durable cautionary tale. It underscores the significant legal and practical consequences that can flow from seemingly minor imprecisions in an arbitration clause. While courts in arbitration-supportive jurisdictions like the United States may often strive to uphold the parties' underlying intent to arbitrate by employing statutory tools like FAA §5, such judicial rescue operations are inherently uncertain, time-consuming, and costly.

The clear lesson is that proactive, meticulous, and informed drafting is the most reliable way to ensure that an international arbitration clause functions as intended—as a clear pathway to efficient and effective dispute resolution, rather than an obstacle course paved with preliminary litigation. For U.S. businesses operating internationally, investing the necessary attention in this critical contractual provision is an essential element of prudent risk management.