Effective Arbitration Clauses in Commercial Litigation 

Arbitration can be an efficient way to resolve commercial disputes without the need for expensive litigation. The commercial litigation attorneys at Delahunty & Edelman, LLP represent clients in arbitration proceedings, and we can give you advice on how to structure effective arbitration clauses.

You have the ability to choose the rules for arbitration ahead of time when you agree to a contract. If you do not specify rules, you may be forced into disputes about the procedures for the arbitration. Conversely, a well-drafted arbitration clause can mean that you have a proceeding that meets more of your needs and can reduce much of the uncertainty.

An Arbitration Clause Should Be Self-Executing

Two parties would agree in advance that they would arbitrate any disputes rather than going to court. The arbitration clause is binding, and courts almost always uphold them according to their exact language. In the case of Mastrobuono v. Shearson Lehman Hutton, the United States Supreme Court held that private agreements to arbitrate are enforced according to their terms.

Thus, the exact language of the arbitration clause is crucial. You can effectively set the terms of arbitration in advance, reducing some of the uncertainty that you may face in the event of a dispute. Not only can you designate the forum in which the case will be arbitrated, but you can also specify much of the process in advance. The language should be clear enough that it is self-executing without any confusion. For example, two parties could agree that the rules of the American Arbitration Association will apply to the case. You may choose to take it many steps further and specify many of your own rules, so there is no further procedure for the arbitration to begin. 

The arbitration clause should also designate the organization that will administer the arbitration.  Whether you select AAA, JAMS, or any other arbitration administrator, initiating the arbitration will be easier if this selection has been made.  If it is not preselected, the parties will have to agree, which leads to additional potential for dispute and unnecessary litigation.

The Timing of Arbitration and Discovery Control

Arbitration forums offer different options with regard to the timing of the arbitration and the rules governing discovery. Most arbitration administrators provide for standard and an expedited procedure. Expedited procedures usually provide for limits on depositions and written discovery and can lead to lower costs and a quicker resolution. Your needs may be different based on your own situation and resources.  You can specify in the arbitration clause whether you will use the expedited or standard procedures.

In most cases, discovery is a primary driver of litigation costs. Without any language to the contrary in an agreement, the arbitrator would be the one who sets rules for discovery in line with the general procedures of the arbitrating body.  JAMS typically gives arbitrators latitude to set their own discovery rules for a case. The American Arbitration Association (“AAA”) rules limits the scope of discovery with the intent of providing a quicker and less expensive forum than commercial litigation. 

You may want to consider including some language in your arbitration clause to reduce the uncertainty involved when an arbitrator determines the rules. You can tailor the clause to your own needs, depending on whether you want broad or limited discovery. Otherwise, you would have to abide by the rules of the forum and may end up in a dispute with the opposing party about the proper scope of discovery. 

Some areas that pertain to discovery that you may wish to address in the arbitration clause include:

• Depositions: The AAA generally discourages depositions as part of arbitration, while JAMS limits each party to three depositions. 
• Document requests: AAA rules specify that document requests must be reasonable, while JAMS rules state that requests should be restricted in terms of time frame, subject matter and persons or entities to which the requests pertain.
• Interrogatories: AAA rules state that interrogatories should be limited in the interests of speedy litigation
• Requests for admission: AAA rules state that requests for admissions should be similarly limited

You can make discovery broader or more limited, depending on your needs and expectations. 

The Selection of Arbitrators

The AAA has somewhat complex rules about the selection of arbitrators in your case. Generally speaking, the parties would receive a list of arbitrators, and they would strike names from the list and rank the remaining names in the order of preference.

Even if you get to strike and rank names, there is still much uncertainty surrounding the selection of one or more arbitrators. If you tailor your own provision regarding the selection of arbitrators, it can include:

• The number of arbitrators 
• The process for selecting arbitrators
• How each party may strike arbitrators
• How the Chair of a panel is selected
• Giving the arbitrator the authority to set any rules that are not agreed upon in advance

Location of the Arbitration

One potential controversy is when there is an arbitration clause that does not specify the forum in which the case would be heard. If one party initiates arbitration in front of the AAA, while the other prefers the JAMS forum and will not participate in front of the AAA, the case could end up in court when one party moves to compel arbitration. 

In addition, you may want to consider specifying the location of the arbitration in advance. The last thing that you want is to be forced to attend an arbitration in an inconvenient forum. Under AAA rules, if the location is not specified in the arbitration clause, the claimant could request a certain location to which the respondent must object. Under JAMS rules, JAMS may decide the location of the arbitration if the parties cannot agree.

The consequences of the failure to lay out rules in advance could defeat the purpose of arbitration. If there is vague language in the arbitration clause, or if no forum is designated, the two parties could end in litigation over the requirements of the clause itself. You may need to compel the other party to attend arbitration if the agreement is unclear and you want to initiate arbitration in front of AAA and JAMS. 

You have much freedom to agree upon an arbitration clause that suits your needs, but it must be specific to provide the maximum value.

Sources:

https://adr.org/sites/default/files/Commercial%20Rules.pdf

https://go.adr.org/rs/294-SFS-516/images/AAA341_AAA_Discovery_Best_Practices_Construction_Arbitration.pdf 

https://www.jamsadr.com/rules-comprehensive-arbitration/

https://www.adr.org/sites/default/files/document_repository/A_Guide_to_Commercial.pdf

https://www.adr.org/sites/default/files/document_repository/Locale_Determinations_AAA_Employment.pdf

https://www.jamsadr.com/rules-comprehensive-arbitration/#Rule-5 

https://scholar.google.com/scholar_case?case=14483623828467426154&q=Mastrobuono+v.+Shearson+Lehman+Hutton&hl=en&as_sdt=6,29&as_vis=1