Drafting an Arbitration Clause

Including an arbitration clause in your contracts should be more than just a pro forma exercise. If you're not carefully crafting your arbitration agreements so that they work effectively in your favor, you're wasting a valuable opportunity, and you may find yourself expending some of the time and money in litigation that you were hoping to save. Here are just some of the things a precisely tailored arbitration provision can cover.

What Disputes Are Arbitrable
Although the point of arbitration is to avoid litigation, often a party who is unwilling to arbitrate will file a lawsuit claiming that the particular matter in dispute is not covered by the arbitration clause. But if that clause says that the arbitrators decide what disputes are covered, you may be able to shortcircuit a lengthy litigation process and bring the case back to arbitration where it belongs. 

In addition, you can limit the grounds upon which an arbitration award can be appealed or vacated, which can cut down on the possibility of post-award judicial proceedings. You can also allow for appeals within the arbitration process itself, to be heard by an arbitral appellate panel.

Where the Arbitration Will Be
You can specify which arbitration forum will hear any claims. Some of the options are the American Arbitration Association, FINRA, JAMS, or National Arbitration and Mediation. But these organizations have locations throughout the country, or in some cases, throughout the world. Accordingly, you can also specify precisely which location in which city is to be the forum for disputes. Of course, you will want to choose a location convenient for your business.

Who the Arbitrators Will Be
You can name particular individuals to act as arbitrators in the event of a dispute, or set forth the process by which arbitrators should be chosen. You may wish to include qualifications for the arbitrators. Arbitrators might be chosen from the roster of neutrals held by one of the major arbitration providers, or might be individuals with experience in a particular industry. You may want one arbitrator, or a panel of three.

What Law and Rules Will Apply
Choice of law is a common provision in an arbitration clause. You can choose, for example, the laws of the state where your business is based, or the laws where you are incorporated, if those two places are different. But you can also designate which rules will apply during arbitration proceedings. One option might be state or federal rules of procedure or evidence. Another is to select the rules of the arbitration forum. But you must be precise about which rules, because each arbitration provider has several sets. JAMS, for instance, has Comprehensive Arbitration Rules, Streamlined Arbitration Rules, Arbitration Discovery Protocols, Construction Arbitration Rules, Employment Arbitration Rules, and International Dispute Resolution Rules. The American Arbitration Association also has at least six sets of rules. It is therefore not enough simply to say, as many sloppily-drafted provisions do, "JAMS arbitration rules," or "AAA arbitration rules."

What Discovery Will Be Allowed
Along with choosing the applicable procedural rules, you can establish limitations on discovery that can help speed up the process. You might consider whether you wish to allow depositions (which are disfavored in some forums), and if so, how many. The same goes for document requests and interrogatories. One of the features of arbitration is that it allows the parties to minimize the discovery disputes and motion practice that can bog down litigation. Take full advantage of this option.

Other Provisions to Consider
You may also want to address some of the following:
  • Whether the parties must negotiate or mediate before filing a claim;
  • What the time frame should be for filing a claim and concluding the process;
  • What power the arbitrators may have to create remedies - that is, will they only be allowed to issue a monetary award, or will they be able to grant equitable relief (ordering a party to do or not to do something); and
  • To what extent the proceedings will be confidential, and what the consequences may be for breaching a confidentiality requirement.
Although you want your arbitration provisions to work to your benefit, be careful not to make them so one-sided that a court may find them to be unconscionable and therefore unenforceable. This is particularly true when the parties you contract with include customers or clients who may not have the opportunity to negotiate the terms of any agreement.

Choose the Right Attorney
Bryan Forman has extensive experience representing both institutional and individual clients in arbitration. He has the skill not only to handle all of your arbitration matters, but to help you better prepare your agreements to insulate you from unnecessary litigation and establish a favorable playing field. Contact our office today at 866-597-2221 or via our online contact form today.

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