Drafting Alternative Dispute Resolutions Clauses — Arbitration Clauses

We’ll finish up this series on alternative dispute resolution with a discussion about the issues relating to the drafting of arbitration clauses. Arbitration clauses and agreements tend to be more complex than the negotiation or mediation portions of alternative dispute resolution clauses and agreements, so there are often quite a few issues to consider in just arbitration alone.

– Number and selection of arbitrators: Your arbitration can use just one arbitrator, but if you’re afraid of an out-of-left-field result from a single arbitrator, you can utilize a panel of (typically three) arbitrators. Don’t forget, though, that the more arbitrators you use, the more expensive arbitration gets. Selection of arbitrators can be accomplished by a neutral arbitration service (such as the American Arbitration Association or JAMS) — again, more expensive — or the parties themselves can select arbitrators. It can be difficult to get parties in a legal dispute to agree to anything, but the usually effective method involves having the parties rank 5 or so arbitrators they want to use, each party gets to strike out an arbitrator on the other’s list, and the arbitrator with the highest average rank is selected. If you are intent on utilizing a panel, don’t fall for the process of each party selecting their own arbitrator who select a neutral third — you essentially have a single arbitrator arbitration at the cost of a panel arbitration — instead, select the whole panel through the list method or another completely neutral method.

– Rules: As arbitration is the most court-like of the alternative dispute resolution methods, arbitration needs a set of codified rules. Although the parties can draft up their own rules from scratch, generally an existing set of standard rules, either from the American Arbitration Association or JAMS, is selected and modified as necessary. The American Arbitration Association and JAMS also have different “flavors” of rules — for example, JAMS has a set of Streamlined Arbitration Rules, for a more informal and speedy arbitration process. Before picking a set of rules, read them and make sure you like them (keeping in mind that you and the other party can modify them as necessary, so they don’t have to be perfect). In particular, pay attention to any deadlines that the rules may set — your company’s counsel might get surprised with a motion and only have a few days to draft a response.

– Process: Parties can either manage the arbitration process, and indeed the whole alternative dispute resolution process, through a service such as the American Arbitration Association or JAMS, or they can manage the process on their own (and just utilize a service’s standard rules). Having a service manage the process takes a lot of the burden off the parties, and helps the process run smoothly if the parties are incapable of running it themselves, but it is also often more expensive.

– Discovery and motion practice: Having too much discovery and motion practice in the arbitration process is one of the main reasons why it can end up becoming more expensive than a trial — you don’t have to pay a judge every time you are in court to have a motion heard, but you do have to pay the arbitrator to hear each motion. If your company is going to be in the position of needing to obtain evidence to support your claim, you will need more discovery; similarly, having motion practice can allow easier disposition of the claim. But the parties need to put limits on discovery and motion practice in order to keep costs down.

– Interest on awards: You may also want to decide on the issue of interest on arbitrator’s awards for the victorious claimant. The parties can not only agree on the circumstances in which the arbitrator can award interest, but also how much interest (the parties may want a market-level interest rate, rather than the higher rates imposed by courts).

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As a final note to wrap up this whole series on alternative dispute resolution, remember that you don’t need to spell everything out in the alternative dispute resolution clause in your agreement — it might end up becoming longer than the rest of the agreement! You can, by agreement, leave many of these details to be decided in a mediation or arbitration agreement if a dispute does arise; however, if you get to a dispute the relationship between your company and the other party may have deteriorated such that coming up with an agreement is a difficult and time-consuming process. If you have a feeling that might end up happening in your company’s relationship with the other party, it may be a better idea to be more specific in the alternative dispute resolution clause in your general agreement. At the very least, the clause should set out what kinds of dispute resolution will be used to settle the claim and begin to set up the framework of the process.