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Eight Tips for Drafting Better Arbitration Clauses

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December 02, 2005

Do you have a typical arbitration clause that you like to use in your contracts? Consider these eight ways of improving the prospective agreement to arbitrate a dispute:

1. How should the question of enforceability of an arbitration agreement be resolved? The arbitration clause can so specify, but only if written in clear and unmistakable language. For example: “In the event of any claim that this arbitration agreement is invalid or is not enforceable by the arbitrators, the arbitrators shall determine whether the arbitration agreement is valid and enforceable. The parties agree that this determination, often reserved for the courts, is hereby submitted to the arbitrators.”

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2. How should dispositive legal questions be resolved? The arbitrators could be authorized to determine the equivalent of motions for summary judgment, but the award could be overturned because of the failure of the arbitrators to hear evidence that otherwise would be relevant to the claim or defense. If you believe that the ability to bring a dispositive motion would be useful, despite this risk, include in your arbitration agreement a sentence indicating that, for example, “the arbitrators may hear and determine any preliminary issue of law asserted by a party as dispositive, to the same extent that a court could hear and determine a motion for summary disposition.”

3. Should the matter be heard by one or three arbitrators? How should they be selected? You should consider this, and specify your ideal in the agreement. Example: “Within ___ days after the commencement of arbitration, each party shall select one person to act as arbitrator and the two selected shall select a third within ten days of their appointment. If the arbitrators selected by the parties are unable or fail to agree upon arbitrator, the third arbitrator shall be selected by the American Arbitration Association.”

4. Do you expect preliminary relief to be available, before the determination of the full claim? The Commercial Rules of the American Arbitration Association permit preliminary relief. (These are called the “Emergency Interim Relief Procedures” of those Rules.) They permit the holding of monies in escrow, the issuance of an injunction, and other means necessary to preserve the status quo. However, if you anticipate that preliminary relief may be necessary, it will speed the matter if the arbitration agreement explicitly permits a party to apply to the arbitrators for that preliminary relief. Example: “Either party may apply to the arbitrator seeking injunctive relief until the arbitration award is rendered or the controversy is otherwise resolved. Either party also, without waiving any remedy under this agreement, may seek from any court having jurisdiction any interim or provisional relief that is necessary to protect the rights or property of that party, pending the establishment of the arbitration tribunal.” Remember, too, that arbitrators proceed carefully with great attention to their authority to do anything beyond the typical award. If you want the flexibility to ask the panel to modify preliminary relief after deciding the whole claim, include that in the arbitration agreement. For example: “Either party may apply to the arbitrator to modify a ruling for preliminary relief before or concurrently with the arbitration hearing.”

5. Does the choice of law matter to you? If so, provide that “This agreement shall be governed and interpreted in accordance with the laws of [jurisdiction].”

6. What remedies are available to the arbitrators for determining the full claims and defenses? For example, the parties may agree that the arbitrators can award equitable relief, attorney fees, punitive damages, compensatory damages only, pre-award interest, liquidated damages, a high/low determination, etc. They may agree to place a dollar limit on the award, or to specify a certain rate of pre-award interest (so long as it does not duplicate any pre-judgment interest awarded when the judgment is rendered by a court). Examples: “Any award in an arbitration initiated under this clause shall be limited to monetary damages and shall include no injunction or direction to any party other than the direction to pay a monetary amount.” “The arbitrators will have no authority to award punitive or other damages not measured by the prevailing party’s actual damages, except as may be required by statute.”

7. Are there issues of confidentiality that will arise during arbitration? If so, provide for the protection of trade secrets by means of a non-disclosure agreement, the imposition of liquidated damages, or other protection.

8. Are you concerned that the other party may run out of funds during the arbitration? Some clients have been in the frustrating position of having an opponent stop paying its share of the arbitration fees. That failure can result in a paralysis of the dispute: it stops dead in its tracks; there is no further arbitration and no award is entered. Consider including in the agreement a provision that states that “the failure by one party to pay its share of arbitration fees constitutes a waiver of the claim or defense in the arbitration,” or some similar language.

For more language, and more considerations in drafting your arbitration clauses, consult “Drafting Dispute Resolution Clauses—A Practical Guide” published by the American Arbitration Association. For more information, contact Kathryn J. Humphrey at (313) 568-6484 or [email protected]

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