Drafting the Arbitration Clause: A Primer on the Opportunities and the Pitfalls
Sussman, Edna, Kummer, Victoria A., Dispute Resolution Journal
A review of some of the crucial issues that should be considered in order to draft an effective arbitration clause.
The arbitration clause is often thrown into the contract at the last minute as the parties toast the conclusion of their negotiations. Usually little more than an afterthought, it deserves considerably more attention from the careful lawyer. Because the arbitration clause can become highly significant down the road if the parties' relationship deteriorates, arbitration practitioners have recognized that the clause should be shaped in a thoughtful and careful way to the transaction and the parties' needs for an economical and efficient dispute resolution process. The opportunity to do this is before the heat of battle. It is during the drafting of the contract.
The ability to choose the terms of the arbitration clause is one of the signal advantages of arbitration, and it is this ability that differentiates arbitration from court litigation, where parties are bound by local court rules and the civil procedure laws of the jurisdiction in which the court sits. Drafters have the opportunity to streamline the resolution of any subsequent dispute, to ensure that it is heard by ap propriate decision makers, and to maximize the chances of enforcing the ultimate decision. Con versely, carelessness in drafting can lead to "pathological clauses" that are not en forceable, procedural requirements that are im possible to satisfy, and provisions that endanger the enforceability of the final award.1
While length constraints and the vagaries of the many kinds of contracts containing arbitration clauses preclude an exhaustive review of all of the considerations that should go into drafting an arbitration clause, we review some of the most crucial issues that should be considered. The "boilerplate" arbitration clause and the arbitration provision used in the last deal are not sufficiently tailored to be inserted automatically in all contracts.
Do No Harm
Litigation over the arbitration clause is the last thing parties want when a dispute arises and a party demands arbitration, but that is precisely what will occur when arbitration is demanded against an unwilling respondent under a poorly drafted arbitration agreement. Such agreements can prompt litigation of fundamental issues, such as whether there is an agreement to arbitrate and, if there is, what its scope is. To avoid making drafting mistakes, practitioners who are unfamiliar with the nuances of arbitration clauses should use established arbitration clause phraseology. There are excellent re - sources to assist in the drafting of the dispute resolution clause, for example, the American Arbitra - tion Association's (AAA) Drafting Dispute Resolution Clauses2 and the International Bar Association's (IBA) Guidelines for Drafting International Arbitration Clauses,3 both of which provide de tailed guidance on the subject.
The AAA Commercial Arbitration Rules (AAA commercial rules) contain the following straightforward, broad arbitration clause, which has been tested in court:
Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.4
First Steps in the Analysis
The first step the drafter should take is to raise a number of questions with the client, such as: What kinds of disputes are likely to arise? Is the client likely to be a claimant or respondent? Will there be a need for prompt resolution from a business perspective? Will there be a need to assert extra-contractual claims (i.e., claims that are beyond the subject of the contract containing the arbitration clause)? Is confidentiality im portant? Does the transaction have international ramifications? …