Draft Effective Commercial Arbitration Clauses
By Daniel S. Terrell
Daniel S. Terrell is an associate in the New Orleans office of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, and is Chair of the YLD Dispute Resolution Committee. Daniel can be reached at dterrell@bakerdonelson.com.
Although the benefits and burdens of arbitration are often the subject of intense debate, the primary reason for incorporating arbitration in a commercial agreement is generally based on the belief that arbitration is faster, less expensive, and more flexible than the court systems. The practical reality, however, is that a boilerplate arbitration clause can still lead to cost-intensive, protracted court proceedings. In addition, it’s likely that merely inserting a form clause would not increase the chance that arbitration could resolve a future dispute in an efficient manner. This article discusses a few elements to consider when drafting an arbitration clause with the goal of increasing the effectiveness of commercial arbitration.
Combined ADR Approach
Arbitration can be combined with another form of alternative dispute resolution like mediation to increase the likelihood of settlement before significant costs are incurred. This other form of ADR is used as a precursor to the arbitration and can narrow the issues for any future litigation if settlement does not occur. Some parties are now agreeing to resolve commercial disputes by using a collaborative law process prior to any mediation or arbitration, in which (1) the parties agree to engage in a series of intense settlement negotiations, and (2) the parties’ legal counsel agree to withdraw from representation if the process is terminated without settlement.
Minimize Prearbitration Court Proceedings
Parties can specifically reserve for the arbitrator the power to decide “substantive arbitrability” issues that are normally decided by a court, i.e., the arbitrator can be empowered to decide whether a valid agreement to arbitrate exists and whether the specific dispute falls within the scope of that agreement. The intent behind empowering the arbitrator in this regard is obviously to avoid the necessity and cost of litigating substantive arbitrability claims in court.
An effective arbitration clause contemplates that a party will institute court proceedings in an attempt to frustrate a future arbitration. Disincentives can be used to minimize the occurrence of such an attempt. A clause can provide, for example, that if a party chooses to litigate the dispute in court, that choice (1) is a separate breach of the contract for which stipulated (or liquidated) damages and attorneys’ fees are recoverable and (2) is a waiver of the party’s right to pursue in court and arbitration all claims, remedies, and defenses in connection with the dispute. Similar penalties can be used to address the case if a party refuses to arbitrate and must be compelled by a court to submit to the process.
Managing the Arbitration Proceeding
Arbitration clauses often call for the application of procedural rules generated by a private agency such as the American Arbitration Association and the International Chamber of Commerce. Although an agency’s rules can act as a baseline for the effective management of an arbitration, the following additional controls may not be adequately addressed in such rules and should be considered on a case-by-case basis.
  • Insert a venue provision for where the arbitration hearing will be held.

  • Allow for the consolidation of multiple arbitrations and the joinder of parties when multiparty contracts or multicontract arrangements exist.

  • Restrict the arbitrator’s authority to fashion any remedies the parties deem undesirable, e.g., punitive damages, sanctions, fees, costs, and expenses.

  • Enlarge the arbitrator’s authority to decide dispositive, prehearing motions.

  • Tailor limitations on the availability and scope of discovery based on potential claims and the complexity of the underlying business relationships, which limitations may concern (a) the maximum number of depositions (if any), hours for each deposition, and written discovery requests; and (b) the production of electronically stored information.

  • Employ reasonable time restrictions for motion practice, discovery, the hearing, the rending of an award, and the publication of any written, reasoned explanation of the award.
Minimize Post-arbitration Court Proceedings
Courts—not arbitrators—have
the power to reduce arbitration awards to enforceable judgments. Hence, court proceedings at this stage are nearly inevitable, absent settlement. Although the law limits the judicial review of arbitral awards, the parties may wish to restrict judicial review further to foreclose the possibility of prolonged court proceedings concerning the award’s enforcement. In this regard, the arbitration clause may include an exclusion agreement through which the parties waive the right to bring any questions of law before the courts in connection with the award’s enforcement. In addition, the parties can specify the venue for the confirmation, modification, or vacatur of the award.
Last, take great care to ensure that the drafted clause complies with applicable law, whether the Federal Arbitration Act, the New York Convention, and/or your state’s arbitration laws.
• How Arbitration Works, 6th ed. 2003. PC # 5250204B1335. ABA Section of Labor and Employment Law.
• Commercial Arbitration at Its Best, Successful Strategies for Business Users. 2000. PC # 5070368. Section of Business Law, Section of Dispute Resolution.