A well-constructed dispute resolution clause is the foundation of a cost-effective and efficient dispute resolution process. Yet courts regularly are faced with arbitration clauses that are problematic in some respect.
Inserting an alternative dispute resolution (ADR) clause in their contracts allows parties to customize the dispute resolution to their individual circumstances. Since arbitration is a creature of contract, parties must be very clear concerning the process they have elected to utilize to resolve potential disputes.
The Four Musts of a Solid Arbitration Clause
If an arbitration agreement does not meet the four following requirements, the process is inherently flawed and subject to court intervention or delay and inefficiency.
An effective arbitration clause provides for a process that
- Results in a meaningful, enforceable outcome;
- Minimizes the intervention of state or federal courts in what should be a private dispute resolution process;
- Grants the third-party administrator and/or the arbitrator the powers necessary to resolve the dispute;
- Is conducted in accordance with procedures that help guarantee a fair, efficient proceeding.
Following is the first of four of the most common flaws found in clauses encountered by the AAA, with pointers on how to avoid replicating these mistakes in arbitration agreements.
Common Flaw #1: AMBIGUOUS INTENT OF THE PARTIES
Any ambiguity concerning intent or scope can delay resolution and hamper enforcement of the award. The following clause examples do not provide sufficient clarity.
Clause: Any dispute under this agreement shall be settled by binding arbitration unless any third party is materially necessary to the resolution of the dispute, then arbitration shall not be so mandatory unless the third party agrees unconditionally to participate.
Flaw: So who decides if a third party is “materially necessary” or agreed “unconditionally” to participate? And exactly when isn’t arbitration mandatory? If the parties disagree as to whether a third party is “materially necessary” or a “materially necessary” third party refuses to participate, court intervention might be required.
Clause: Every dispute of any kind or nature shall be submitted to arbitration unless it is a technical dispute which shall be resolved by a technical expert appointed by the parties.
Flaw: Who determines whether it is a technical dispute? How shall a technical expert be selected? What if the parties cannot agree upon a technical expert? Shall the technical expert resolve the dispute by means of binding arbitration?
Clause: In case of a dispute, the parties undertake to submit to arbitration, but in case of litigation, the Tribunal de la Paris shall have exclusive jurisdiction.
Flaw: This clause is clearly ambiguous concerning the intent of the parties to resolve a dispute by means of binding arbitration.
Clause: The Members agree to enter into binding mediation or arbitration to resolve disputes concerning fulfillment of membership duties. If there is a failure to reach an agreement through arbitration or mediation, a complaint shall be filed in the appropriate court.
Flaw: This clause implies that arbitration shall be non-binding, since a party may file suit in court if it isn’t “agreeable” to the arbitrator’s decision.
Clause: Disputes among members will be decided by a majority vote. A member has the amount of votes according to the member’s percent of interest. There has to be a majority vote for an action to take place. All disputes shall be submitted to the American Arbitration Association for resolution in accordance with the Commercial Arbitration Rules.
Flaw: So must disputes among members be resolved by majority vote or by an arbitrator, as per the Rules?
Practice Tip to Avoid This Mistake
Utilize a broad arbitration provision that makes clear that all disputes are arbitrable. Invoking a complete set of rules and procedures 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 court order, by an arbitrator, or by agreement of the parties. Always include a statement that arbitration agreements included in prior contracts between the parties have been overridden by the arbitration provision in the most recent contract.
An Embarrassment of Riches
Parties in Ragab v. Howard, 841 F. 3d 1134 (10th Cir. 2016) had arbitration clauses in each of their six business contracts, each with different rules, arbitrator selection process, notice period before arbitration, and provision for attorneys’ fees. Because there was nothing in the contracts that allowed one contract to override the others, the judge found that the arbitration clause was unenforceable, and the matter remained in court.
Next Blog: Common Flaw#2: Buried, Unrealistic, or Ambiguous Filing Requirements
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