What In-House Counsel Need To Know About Their Form Arbitration Clauses - Ten Foundation Questions
Most arbitrations, and all commercial arbitrations, are creations of contract, and courts are generally required to enforce an arbitration agreement as they would any other contract. Therefore, the terms of the arbitration clause in your commercial contract are critical. Careful review of that clause surely must be a component of your enterprise’s risk analysis. Here are 10 basic considerations that will help to guide that review.
1. How Will The Arbitration Be Managed?
The arbitration clause should set forth the procedural rules that will apply -- e.g., by adopting those of an administering institution like the American Arbitration Association, CPR, or JAMS; or by specifying ad hoc rules solely of the parties’ devising -- and it should identify the place of arbitration. Also, make sure that any related contracts are in alignment with respect to their dispute resolution clauses.
2. How Many Arbitrators Do You Want?
Specify the size of the arbitral panel -- typically a single arbitrator or three. Obviously, using one arbitrator will be less expensive than a three-person panel, and will likely permit more efficient scheduling. On the other hand, a three-person panel brings broader experience, knowledge, and perspectives, and some companies believe that a decision from such a panel of arbitrators is likely to be more balanced and fair than from a single arbitrator.
3. How Will Your Arbitrator(s) Be Selected?
There are several possible protocols for the selection of arbitrators, and the arbitration clause should make clear which appointment procedure will be used. Most arbitration institution rules include provisions prescribing the means for selecting arbitrators; however, an arbitration clause may adopt a set of such rules, carve out exceptions, and/or substitute ad hoc rules. Thus, for example, you may agree that an arbitration will be conducted in accordance with the then applicable Commercial Arbitration Rules of the American Arbitration Association except that the arbitrators will be selected in the following manner (and then specify that selection process).
In bilateral arbitrations, many companies prefer that the parties each select their own arbitrator and then have the two party-appointed arbitrators choose the third, who would act as panel chairman. On the one hand, this method of arbitrator selection ensures that you will have some degree of control in the selection process. On the other hand, that “control” is likely to be limited. Indeed, most modern arbitration rules require all appointed arbitrators to be “neutral” and conflict-free.
4. Should You Specify The Arbitrators’ Qualifications?
You may want to specify in your arbitration clause certain requisite qualifications of the arbitrators in order to ensure that your dispute is decided by persons who have expertise concerning your business or a particular subject matter, or who have experience in determining particularly sorts of disputes. The more esoteric the subject of your likely dispute is, the more beneficial it may be to establish corresponding arbitrator qualifications.
On the other hand, setting virtually any prerequisite qualifications limits the pool of potential arbitrators, and potentially disastrously so. If candidates with particular qualifications are unavailable for one reason or another, the parties may be left in limbo ‑‑ possibly to the advantage of one or the other, assuming a desire to delay ‑‑ and the consequences can be costly.
5. Should All Arbitrators Be Deemed Neutral?
When an arbitration clause calls for party-appointed arbitrators, the question may arise regarding whether such arbitrators are to be true neutrals, or whether the appointing party may continue to communicate ex parte with its party-appointed arbitrator during the arbitral proceeding. The standard nowadays is that neutrality/impartiality is required and is to be maintained.
One imagines that having access to one’s party-appointed arbitrator during the proceeding may be useful, for example, in order to be assured that information/evidence is being well understood by all of the arbitrators. On the other hand, the parties’ continued access to their party-appointed arbitrators affords everyone the opportunity to engage in potentially inappropriate tactics. Moreover, party-appointed arbitrators might be expected to be biased and thus to rule in favor of their appointers; in that case, your arbitration will actually be determined by a neutral -- the chairman -- who will only be subject to lobbying by the party-appointed arbitrators.
Whatever choice is made, the arbitration clause should clearly establish – by adoption or specification – the rules regarding party access to arbitrators after their appointment.
6. How Much Discovery And Motion Practice Do You Want?
The arbitration clause may address the nature and extent of (i) disclosure (or discovery) and (ii) motion practice that will be permitted in the arbitration. Administered arbitration rules like those of the American Arbitration Association and JAMS address the extent and types of permitted discovery and motion practice to a degree, and reference to those rules may be sufficient. The rest is left to the parties’ agreement and the arbitrators’ discretion. But for parties who want particular discovery and/or motion practice elements or limits, the means of control is in the arbitration clause. There, one may specify, for example, the extent of document production (including e-discovery), whether party depositions may be taken, and the nature of expert discovery; and whether dispositive motions will be permitted.
7. How Should You Define The Scope Of The Arbitrator’s Authority?
The arbitration clause should clearly define the disputes that are to be arbitrated. Obviously an ad hoc agreement to arbitrate, made after a dispute has arisen, can be quite specific indeed. But arbitration provisions in commercial contracts must describe the scope of arbitrable disputes -- e.g., very broad in scope: “all claims and disputes between the parties”; tailored in scope: “all claims and disputes arising out of or related to this agreement”; or narrower in scope: “all claims and disputes arising out of or related to the termination of employment of John Doe.”
And you may want to limit the scope of the arbitrator’s authority. For example, consider a limitation on the arbitrator’s authority to award consequential and/or punitive damages, or a limitation on awards of arbitration costs, legal fees, etc.
The arbitration clause may also specify the governing procedural law if it is to be something other than the law of the place of arbitration. (The governing substantive contract law can be specified elsewhere in the agreement.)
8. Do You Want To Limit Testimony Or Length Of Hearings?
An increasingly common (if mostly unwarranted) refrain is that arbitrations have become more costly and the process now takes too long. This may be due in part to the inapplicability of the rules of evidence, so that arbitrators are able to allow in the record more testimony and documentary evidence than would be admissible in court. If this is a concern, then you may want to include in your arbitration clause time-conscious provisions, such as requiring (a) pre-filing of all direct testimony, (b) time limits on cross-examination of witnesses, (c) pre-filing of written expert witness reports, (d) hot-tubbing of expert witnesses, etc.
9. Do You Want To Provide For The Award Of Costs and/or Fees To The Prevailing Party?
One way to encourage parties to regard settlement sensibly is to authorize the arbitrators to award attorneys’ fees and costs to the prevailing party.
In addition, the arbitration clause may specify a rate of post award, pre-judgment interest on the awarded amount.
10. Do You Want To Require Mediation, And If So When?
Participating in mediation is increasingly common, whether the dispute is to be arbitrated or adjudicated. Consider whether to include in your arbitration clause a requirement that the parties participate in a mediation before an arbitration may proceed. But consider also that mediation may be benefitted by allowing for some discovery/exchange of information beforehand.
Mandating meetings of senior decision-makers even before mediation is a possible measure as well, and can be included in a multi-step dispute resolution clause.
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