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Litigation: Avoiding the Arbitration Trap

Courts, bar associations, alternative dispute resolution organizations and private attorneys who serve as arbitrators all frequently laud the benefits of contractual arbitration. Obviously, each has his own financial or institutional bias for encouraging alternative dispute resolutions (ADR); therefore, they frequently describe arbitration as less costly, more efficient and ideally suited for a prompt resolution of disputes with guaranteed finality--a preferable alternative to formal litigation. Unless the contractual arbitration clause is drafted clearly and thoughtfully, however, the risks of arbitration for most corporate clients outweigh the rewards.

I offer no statistical proof for the following hypothesis, only anecdotal experience from more than 20 years of practicing in complex civil litigation in state and federal court systems and in all types of arbitration proceedings: Arbitrations are almost invariably more expensive for parties; less certain and far more contentious than judge-supervised litigation; and, of course, the results are almost never reviewable. Rules (to the extent that any are actually intended to apply) are often flouted, delays are the norm, arbitrator and ADR-facilitator billing is virtually unreviewable, and the results are unpredictable and often based on erroneous and uncorrectable interpretations of law and fact.

If I sound frustrated with experiences in arbitration, it is only because, candidly, I believe insufficient care was given to drafting the contractual arbitration provisions. The model clauses available from the various organizations do not deal specifically with the critical issues that are most often litigated in arbitrations. Since the origin of arbitration rights lies in contractual agreement (to the extent companies decide that arbitration is preferable to formal litigation), the following should be specifically addressed--despite the natural inclination toward simplicity in drafting:

? Specify the procedural rules that apply; for example, AAA Commercial Rules.

? Notwithstanding the specification of such rules, articulate an arbitrator selection process and timeline for selection.

? Set forth whether discovery and motion practice will be allowed and what procedural rules will apply to each.

? Clearly and unambiguously select the choice of substantive law that applies to any dispute.

? Select the venue for the arbitration proceeding, the court in which the award may be confirmed, and the law the will govern the potential challenges to confirmation (in this last regard, you can even agree to the grounds, if any, that could support a challenge to the award).

? Carve out with specificity any disputes that are NOT arbitrable (e.g., tort claims, punitive damages, equitable relief).

? If the parties agree that a "prevailing party" shall be entitled to fees or costs as part of the award, define prevailing party (i.e., obtaining monetary award of at least 50 percent of the amount claimed).

? Specify the type of award that will be required--reasoned or summary--often depending upon the contemplated challenges to confirmation.

These are just a few examples of how parties can exert control over what surely was originally intended to be a preferable alternative to litigation in court. The greater the specificity on these issues in the contracts, the less litigation there will be in the arbitration about matters other than the merits of the dispute.

Chad Hummel

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