Tips on Drafting Arbitration Clauses
Drafting an arbitration clause in a contract is more of an art than a science, but many contract negotiators treat the dispute resolution clause as an after thought, throwing it into the contract at the eleventh hour, which can lead to a clause that is too vague, useless, unenforceable, or worse – winds up being the subject of a costly court challenge. Doing a little homework and working with an experienced lawyer to help craft an arbitration clause tailored to your business risks is a sound strategy for getting the cost savings and efficiencies you want when it comes to resolving your disputes.
When drafting your dispute resolution clause, keep in mind the following tips:
- At a minimum, determine the scope of the disputes to be arbitrated. Will all disputes arising under or in connection with the contract be subject to arbitration? Or will you carve out specific types of disputes and use a different dispute resolution method for those?
- Specify the applicable arbitration rules that will govern the arbitration. Be sure to check the rules to see if they fit the parties needs or whether they should be modified. Consider whether certain disputes might be more appropriate for expedited procedures. Leaving the selection of the rules up to the parties to agree upon later (an ad hoc arbitration) is often a recipe for disaster. Once the dispute rises to the level of initiating arbitration, the parties are rarely in a position to agree on much let alone the administrative and procedural rules by which their dispute will be resolved. It is much safer to agree upon these rules in advance while the relationship is still amicable.
- If the parties intend to submit disputes to final and binding arbitration, be clear and unequivocal in the clause and make arbitration the exclusive forum for the resolution of such disputes. Avoid using permissive words, like “may submit the dispute to arbitration” and avoid referring to alternative forums, such as “if any disputes result in litigation, they shall be heard in the United States District Court.” Leaving the clause open for interpretation leads to court challenges, motion practice, delays, and increased costs.
- Consider additional specifics if appropriate to the parties’ risks, including the number of arbitrators, the place of arbitration, the governing law, how emergency or injunctive relief will be handled (in court or by the arbitrator), and whether there will be any appellate rights or review of the arbitral award. Again, review the applicable institutional rules to see if they conflict and make sure the clause is clear and unambiguous if it differs from the specified rules.
- Lastly, detailed arbitration clauses may cover apportionment of costs, the payment of attorneys’ fees, the arbitrator’s ability to award interest and punitive damages or limitations on same, multi-party contracts, and more. To the extent these are included, thought should be given to anticipated risks unique to the parties and their business needs.
If appropriately drafted, the dispute resolution clause can be an efficient and cost effective method to resolving conflicts outside of court. It can be tailored to your individual risks and set forth a clear path for a swift alternative to litigation. Importantly, it can give you control — control over the scope, control over the costs, and control over who adjudicates your dispute. This contractual provision is worth spending the time and effort to draft properly and sensibly.
ABOUT JENNIFER GRIPPA
As a mediator and arbitrator at Miles, Jennifer Grippa handles complex disputes, including automobile, aviation, banking, bankruptcy, business/commercial, civil rights, construction, contracts, cybersecurity, employment, engineering and construction, environmental, estate/probate/trusts, false arrest and imprisonment, federal law, government, insurance, intellectual property, international, medical and nursing malpractice, personal injury/torts, premises liability, product liability, professional liability, real estate, securities, surety, third party criminal acts, trucking, trusts and estates, and wrongful death matters.