A well-constructed dispute resolution clause is the foundation of a cost-effective and efficient dispute resolution process. Yet courts are regularly faced with arbitration clauses that are problematic in some respect.
Inserting an alternative dispute resolution (ADR) clause in a contract allows parties to customize the dispute resolution based on individual circumstances. To that end, there are four things a solid arbitration clause must do: (1) Result in a meaningful, enforceable outcome, (2) minimize the intervention of state or federal courts, (3) grant the arbitrator the powers necessary to resolve the dispute, and (4) use procedures that help lead to a fair, efficient proceeding.
Unfortunately, many clauses fall short of that standard. Let’s take a look at some of the most common flaws encountered by the American Arbitration Association® (AAA®), as well as some pointers about how to avoid these mistakes.
Ambiguous Intent by the Parties
Any ambiguity concerning the intent or scope of the agreement can delay resolution and hamper enforcement of the award. Clarity is paramount in these types of agreements. Do not use potentially ambiguous phrases like “materially necessary” or “agrees unconditionally.” This type of language is so broad that it leaves the door open to disputes about meaning.
Instead, use an arbitration provision that makes it clear that all disputes are potentially open to arbitration. This eliminates the need to spell out each contingency and potentially dozens of procedural matters. Arbitration can continue despite an objection from a party, unless the proceedings are stayed by a court order, an arbitrator, or an agreement between the parties. And always include a statement that makes it clear that the arbitration agreements in prior contracts between the parties have been overridden by the arbitration provision in the most recent contract.
Buried, Unrealistic or Ambiguous Filing Requirements
Filing requirements that are intended to speed up a dispute resolution process sometimes have the opposite effect, especially if they are unintentionally unrealistic or ambiguous. For instance, do not draft a clause that states that prior to filing for arbitration, a party must submit “written documentation” to an unidentified “project manager or service delivery engineer” within 15 calendar days of the alleged performance breach. In that case, as parties attempt to sort out what specifically is required and who the recipient should be, the entire process actually is drawn out – to everyone’s detriment.
It is better to consider whether deadlines are realistic and the consequences of missed deadlines. The best approach is to grant the arbitrator the authority to extend filing deadlines to provide parties additional time to comply.
Vague Conditions Precedent
The use of undefined conditions that must be met prior to commencing arbitration can delay the proceeding or send parties to court to determine the enforceability of the clause.
For example, it is increasingly common for dispute resolution to be a multi-tiered process, with attempted negotiation and/or mediation a prerequisite to commencing arbitration. While these types of step clauses can be useful, when it is unclear exactly how negotiation or mediation should be commenced, conducted or deemed concluded, disagreements can erupt as to whether the condition has or has not been met.
It is important that the ADR clause is clear about whether specific steps are simply desired or are actually a prerequisite for proceeding to arbitration. Exactly what is required and the timeframe allowed to satisfy the conditions should be clear as well. And the arbitrator must be granted authority to resolve disputes as to whether conditions precedent have been met.
Unrealistic Deadlines and Customized Procedures
Parties must be mindful when deciding to forego an ADR provider’s established default set of rules and instead to draft their own deadlines and procedures. Unrealistic deadlines and procedures can sometimes result in unintended consequences that can potentially derail the whole process. For instance, parties should think about whether their tailored deadlines and procedures are appropriate for the size and complexity of the dispute. Problems can arise when a deadline or a procedure – such as not allowing the ADR provider itself to administratively appoint the arbitrators – is unrealistic, especially if a party refuses to waive an unworkable procedure or to extend a deadline. In addition, failure by an arbitrator to adhere fully to all of the procedures and deadlines set forth in the arbitration agreement (which may be nearly impossible to do) can result in one party challenging the enforcement of the award.
Since failure to meet unrealistic deadlines or to adhere to unworkable procedures could jeopardize the enforceability of the arbitration award, parties should be careful when tailoring their ADR clauses. They may want to consider allowing the arbitrator to determine reasonable timeframes and procedures – or at least granting the arbitrator the authority to extend a deadline or waive a problematic procedure for good cause.
A Silent or Undefined Locale for the Hearings
Clauses that are silent or ambiguous about locale can delay the arbitration. Parties typically do not want arbitrators appointed until the locale is settled – either to reduce travel costs or because they want arbitrators licensed in a specific jurisdiction. Open-ended language such as “the arbitration shall take place in a mutually agreeable location” is problematic: What if no location is mutually agreeable to the parties after a dispute develops?
When designating a locale, bear in mind that the applicable procedural law in that jurisdiction affects questions of procedure, court intervention and enforcement. The available pool of qualified arbitrators in that geographic area may also be an important factor, depending upon the subject matter of the dispute. And the convenience of the location matters too, especially as it pertains to the availability of witnesses, local counsel, transportation, hotels, hearing rooms, court reporters, etc.
An Ineffective Arbitrator Selection Process
Variables surrounding the number of arbitrators and their selection process can add time and costs to the arbitration if they are not spelled out in the agreement. For instance, the intent to appoint one arbitrator should be precisely indicated, as opposed to referencing “the arbitrator” or “an arbitrator.” Costly delays and the eventual appointment of three arbitrators may result if the parties are unable to agree upon the number of arbitrators to be appointed. Because utilizing three arbitrators increases the cost of the arbitration by more than three times that of a single arbitrator and can substantially extend the length of the arbitration, it usually is recommended that the arbitration clause specify the appointment of a single arbitrator.
A poorly drafted arbitrator selection process can also give rise to a host of unwelcome surprises. The process for selecting an arbitrator should be carefully worded to address all foreseeable contingencies. A reliable way to do that is to utilize the selection procedures contained in the chosen ADR provider’s rules.
Inadequate Fee-Shifting Provisions
Most arbitration agreements may include fee-shifting provisions, but problems can arise when assumptions are made. It is important to either clearly state that the claimant(s) and respondent(s) will equally split arbitrator compensation or that each party will pay their proportional share of the arbitration compensation based upon the total number of parties.
A Review of the Award
Parties that wish to allow for an arbitral appeal of the award must use specific language to avoid issues later on. A clause is problematic when it states that an arbitration award cannot be subject to court review (since courts have held that parties can neither convey nor remove jurisdiction from the court) or cannot be subjected to a review on grounds that are not specified in the Federal Arbitration Act or an equivalent state arbitration statute. Instead, the clause should state that notwithstanding any language to the contrary in the contract documents, the parties agree that the underlying award must be at least a reasoned award and, assuming the arbitration is being administered by an ADR provider that has appellate arbitration rules, may be appealed pursuant to the appellate rules of the ADR provider.
Published October 8, 2018.