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Tips for Arbitration Clauses in Leases: Use With Caution

Julia Donnelly Emfinger

Tips for Arbitration Clauses in Leases: Use With Caution
Drazen Zigic via Getty Images

Arbitration was intended to provide a private alternative to the public court system that would be faster, cheaper, and an easier way to resolve disputes. Enacted in 1925, the Federal Arbitration Act (FAA) has now been in place for nearly a century, and in that time, parties have had the opportunity to explore both the benefits and the drawbacks of this system of alternative dispute resolution. As a legal matter, it is fairly axiomatic that arbitration clauses are widely enforced. Recent trends in Supreme Court jurisprudence have affirmed and continued to recognize the ability of parties to select this method of resolving disputes. See Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018); NLRB v. Murphy Oil USA, Inc., 137 S. Ct. 809. But, as Justice O’Connor explained in a concurring opinion in 1995, “over the past decade, the Court has abandoned all pretense of ascertaining congressional intent with respect to the Federal Arbitration Act, building instead, case by case, an edifice of its own creation.” Allied-Bruce Terminix Companies v. Dobson, 513 U.S. 265, 283 (1995) (O’Connor, J., concurring).

While Justice O’Connor referred to the FAA as becoming an “edifice of its own creation,” the same description could be applied in a practical sense to the sophisticated and well-established business of providing arbitration services. As more parties have begun including arbitration clauses in contracts—together with the willingness of courts to enforce such clauses—more disputes have arisen in which arbitration services are needed. As a natural result, organizations like the American Arbitration Association and JAMS have developed rules and procedures that can be nearly as detailed and thorough as those of court systems. A party in arbitration might spend just as much time and as many resources engaging in motion practice as they would in public litigation. As parties have become accustomed to the availability of information through electronic discovery, they expect and insist on the same degree of disclosure in arbitration. Most tribunals also allow for depositions and expert discovery. Thus, particularly in complex commercial disputes, discovery can be as expensive, arduous, and time-consuming as in public litigation. In short, in many cases, arbitration is not any quicker, cheaper, or easier than litigation. Finally, as any party that has been the recipient of an unfavorable arbitration award knows, it is very, very difficult to modify or vacate an arbitration award, and they are essentially immune from review. And, since arbitrators do not have to be lawyers, they are not necessarily going to be influenced or persuaded by legal arguments.

There are some other benefits to arbitration, primarily that parties can agree to conduct arbitration proceedings confidentially and request a confidential award. But this is a double-edged sword, as confirming a favorable award that has been designated confidential can also be time-consuming and raise challenges.

Given these characteristics of arbitration, parties to a lease, particularly a commercial lease, should be mindful of when such clauses can be helpful. On the one hand, a lease dispute could be about a highly technical legal issue of contractual lease interpretation. In those instances, a judge, subject to the constraints of precedent and the possibility of appellate review, may be preferable to an arbitrator. On the other hand, a lease dispute could involve factual or market-specific considerations, like valuations, appraisals, or manner of use. In those instances, someone familiar with real estate generally or even a particular market or specific use can be very useful. In general, when crafting leases, think carefully about what arbitration can offer and the challenges to using arbitration. Then, take the time to craft an arbitration clause that employs arbitration for disputes only where it makes sense for those particular types of disputes.