Thursday, February 25, 2021

Drafting a Better Arbitration Agreement to Stay Out of Court

A recent five-year, ten-state study proved that effectively managed arbitrations save time and money in comparison to litigation. This study found that federal court lawsuits lasted over a year longer than arbitrations decided during the same period, which delay caused direct business losses exceeding $10 billion, in part due to lost management time, the effect of prolonged litigation uncertainty on management decision-making, credit and investor concerns, and lost use of resources tied up by litigation. Delayed dispute resolution is simply bad for business.

Therefore, parties wisely draft their arbitration agreements to limit discovery and motion practice, and, equally important, they carefully select arbitrators trained to run efficient proceedings.

But more forethought is necessary for arbitration to live up to the cost savings it was intended to achieve. Too often, arbitration is delayed – sometimes for years – pending judicial resolution of allegedly ambiguous arbitration provisions. Drafters of arbitration agreements should consider the following to avoid, or at least limit, expensive side litigation.

    1.    Clearly define the scope of the arbitration agreement.

To avoid litigation, the arbitration agreement should make clear:

        a)    That its scope applies to all disputes or controversies arising out of or related to the relationship of the parties or the transaction at issue, including statutory, tort, equitable, common law or contract-based claims, including those arising before as well as after the arbitration agreement;

        b)    That objections to the scope and validity of the arbitration agreement and the underlying contract must be arbitrated; and

        c)    Whether it binds entities related to the contracting parties, whether it requires consolidation of all related disputes to avoid multiple, parallel proceedings, and whether it precludes class actions.

    2.    Define the arbitrator’s authority.

The arbitration agreement should leave no question as to the arbitrator’s authority.  It should:

        a)    Give the arbitrator sole authority to determine whether the parties have satisfied conditions to arbitration, as well as the enforceability of the underlying contract(s) and arbitration agreement, and the scope of the arbitration agreement; and

        b)    Clarify that the arbitrator has broad authority to award damages, injunctive and other equitable remedies, and assess fees, costs and sanctions.

    3.    Draft a fundamentally fair agreement.

One-sided or unconscionable arbitration agreements invite litigation. Organizations like JAMS and AAA are good resources for provisions that are clearly worded, fairly drafted, and commercially reasonable.

    4.    Avoid inconsistent contract terms.

Litigation results when language in boiler plate arbitration agreements conflicts with other standard provisions in the underlying or related contract documents. Commonly inconsistent provisions concern:

        a)    Choice of law and availability of remedies;

        b)    Inapplicable references to courts and judicial venues for dispute resolution; and

        c)    Confusion as to selection or number of arbitrators or arbitral rules.

In summary, a well drafted arbitration agreement should foster the cost-effective resolution of disputes, using language that is consciously crafted to avoid rather than result in litigation.

Author Patricia H. Thompson, Esq., FCIArb, is  a full-time neutral at JAMS, with experience conducting virtual and in-person mediations, arbitrations and other ADR proceedings in construction and other complex commercial disputes.

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