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Drafting Effective Arbitration Clauses

09/22/2016

Preparing for business disputes requires thinking ahead. Businesses can both limit their exposure and maximize their control of potential future disputes through the use of well-crafted arbitration clause.

Arbitration is not a “one-size-fits-all” proposition. Although substantial negotiation often occurs over the business terms of a contract, the contract provisions relating to dispute resolution and arbitration are often overlooked. Only when a dispute arises do those provisions come to the forefront, and they are often not well-crafted to minimize risk and maximize control.

When drafting an arbitration provision, it is important to remember the key questions… Who, What, Where, When and Why?

Who?

Businesses should define and specify which parties should participate in arbitration in the arbitration clause itself. Although most contracts bind the contracting parties to arbitration, other associated parties should be included or excluded from any arbitration to meet your business’ needs. Other parties may include officers, directors, subcontractors, vendors or anyone else who may have an interest in any future dispute. An arbitration provision limited to only certain parties may force you to deal with parallel proceedings in court and in arbitration at the same time, rather than a single proceeding. Defining “Who?” is bound to arbitrate will help to avoid multiple and duplicative legal proceedings.

What?

Arbitration is a matter of contract. Parties can limit or specify what types of disputes are subject to arbitration and what types of disputes are not. Although the tendency is to include all disputes with arbitration, you should define and exclude from the arbitration clause the types of disputes where the right to go to court, particularly for preliminary injunctive relief, needs to be preserved. As an example, contracts often exclude disputes over trademarks or other intellectual property from arbitration to preserve the right to go to court and get immediate relief, if a party is damaging intellectual property in the marketplace. Make sure the types of claims where your business needs the option to go to court are adequately excluded from the arbitration clause. 

Where?

A well-drafted arbitration clause should designate a location where the arbitration will be held and the particular law that should be applied to a dispute. A lack of certainty on these points, particularly within international contracts, complicates disputes and makes them more expensive and time consuming. Selecting an arbitration location and applicable law carries significant operational consequences and legal costs for your business. You should determine the most advantageous location and applicable law for your anticipated disputes, and these items should be contained within the arbitration clause.

When?

An arbitration clause can and should designate some procedures to govern the dispute. If a more expedited proceeding is appropriate, these provisions should be included in the arbitration clause. If you want to require a mandatory meeting, negotiation or settlement discussion prior to initiating arbitration, the provision should contain these requirements. A contract can provide a timeframe for claims to be made subject to arbitration, as well as the time after which such claims can no longer be made. You should identify the critical timing aspects for your business in potential disputes, and the most advantageous timing issues should be included in any arbitration clause. 

Why?

This may seem self–evident, but business must decide whether or not arbitration is actually the most efficient and economical method for dispute resolution. Too often, clients include boilerplate arbitration clauses in contracts only to learn after dispute has arisen that the arbitration is not the best forum for their dispute. Although there are many distinctions between arbitration and litigation within a court, clients often don't understand the financial costs of paying for the arbitrators’ time, especially with a three judge arbitration panel. Also, the limited appeal rights available after arbitration may create additional risks to a business. Before committing to an arbitration clause of any kind, business should take a hard look at what types of disputes may be on the horizon and how the business wishes to handle those disputes.

Because arbitration is a matter of contract, contract provisions can shape the process for dispute resolution. Given the flexibility to craft their own dispute resolution process, businesses should remember to ask, “Who, What, When, Where and Why?” as they negotiate arbitration provisions.

ABOUT THE AUTHOR

William F. Jones

Attorney