[Go here for my New York Law Journal article based on this post.]
[Revised Aug. 30 7:20 p.m. EDT to reflect comments by Mark and Richard; revised further Oct. 18 with respect to "arising out of and relating to," as discussed in this post.]
Here’s the standard arbitration clause recommended by the American Arbitration Association, as stated in the AAA commercial arbitration rules (free registration required):
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.
Here’s what I don’t like about it (with occasional references to A Manual of Style for Contract Drafting)
- The couplet “controversy or claim” smacks of redundancy. (See MSCD 16.11.) Why not just say “disputes”? That’s the word used in the first actual rule stated in the AAA commercial arbitration rules, rule M-1, which refers to “mediation or conciliation of existing or future disputes.”
- The function of “arising out of and relating to” in the standard clause is to make it clear that the arbitration provision covers noncontract claims. But it would be clearer to refer instead to the subject matter of the contract. For example, if you’re dealing with a confidentiality agreement, you could say “any disputes arising out of this agreement or the Recipient’s handling, disclosure, or use of any Confidential Information.” See this October 2009 blog post.
- It’s standard for a contract to refer to itself as “this agreement,” not “this contract.” (See MSCD 1.84.)
- The reference to “or the breach thereof” is redundant.
- This use of shall is inconsistent with the most disciplined use of shall—using it only to impose a duty on the subject of the sentence, as in Acme shall purchase the Shares. The test for this use of shall is whether you can replace shall with “has a duty to.” (See MSCD 2.25.) Use of shall in the AAA standard clause fails this test. The standard clause uses the passive voice, with “the parties” as the missing by-agent (see MSCD 2.67). You could fix that by using the active voice instead (The parties shall settle), but I don’t think that does the trick. There’s a bigger issue lurking here, in that I’m not sure you want to impose on the parties an obligation to arbitrate all disputes. The parties might have all sorts of disputes, but only the really serious ones would rise to the level of something one or both of them would want to arbitrate. So I think it’s best to say that if a party wants to fight over a dispute, then arbitration is their only option. That approach is standard in jurisdiction provisions in contracts providing for litigation rather than arbitration.
- And although I’m not sure how helpful it is, I’ve seen it recommended that one structure jurisdiction provisions from the perspective of both someone bringing a claim and someone subject to a claim, and that logic could apply equally to arbitration provisions.
- The reference to the AAA commercial arbitration rules constitutes not a reference to a title of a work but to a category of document. It’s analogous to referring to a set of bylaws. After all, there are other sets of commercial arbitration rules out there—the standard clause acknowledges as much by referring to “its Commercial Arbitration Rules.” Furthermore, the AAA commercial arbitration rules don’t refer to themselves as such—their title is “Commercial Arbitration Rules and Mediation Procedures”. Lawyers are partial to giving initial capitals to anything that seems important, but they’d do better instead to follow The Chicago Manual of Style, which in this context would recommend lowercase letters. (See MSCD 16.43.) Alternatively, the standard clause could treat this reference as a reference to the title of a work, by saying something like “under its Commercial Arbitration Rules and Mediation Procedures.” But that would seem counterproductive, given that the title is wordy and generic. If the AAA wants further guidance on this, I suggest they submit a question to The Chicago Manual of Style Online.
- I’d address judgment on the award in a separate sentence.
- Using (s) is clumsy. (See MSCD 16.50.) Using instead “one or more arbitrators” would be an improvement, but it would be more succinct to refer instead to the arbitration itself.
So here’s the net effect of making those changes:
As the exclusive means of resolving through adversarial dispute resolution any disputes arising out of this agreement or [describe the subject matter of the contract], a party may demand that any such dispute be resolved by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and each party hereby consents to any such disputes being so resolved. Judgment on the award rendered in any such arbitration may be entered in any court having jurisdiction.
Yes, I know that the AAA’s model clause has, in the words of the AAA’s Drafting Dispute Resolutions: A Practical Guide (free registration required), “consistently received judicial support.” I guess that means it’s been “tested,” but excuse me if I don’t quake in my boots. No rational judge would see anything sinister in my changes, and drafting for the irrational judge is a losing proposition. (Incidentally, the standard clause as stated in Drafting Dispute Resolutions is slightly different from that stated in the AAA commercial arbitration rules.)
But why not simply leave the standard clause as is? Because a rational contract process requires consistent contract language. For anyone drafting a contract consistent with MSCD, the AAA model clause in its current form would strike a discordant note.
And anyway, one should always strive to improve model language. The AAA is considering revising its commercial arbitration rules and welcomes suggestions, which you can email to email@example.com. The deadline is September 1, 2009; consider this my entry, sneaking in under the deadline.