[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 rules@adr.org. The deadline is September 1, 2009; consider this my entry, sneaking in under the deadline.
1. “Parties shall cause” suggests an obligation on the parties to do something, whereas a jurisdiction clause should operate automatically without further action. [Prompted by this comment, I changed the verb use in my proposed language–KAA]
2. If there is case law indicating that “arising out of” is too narrow, then forget style, the task is to make the clause legally effective. Why refer to tort specifically when this might miss other causes of action. Better to be general with “or relating to”.
Otherwise I like your changes.
Mark: Regarding your first point, the essential inquiry, in the MSCD scheme of things, is what category of contract language would work best. One alternative to language of obligation would be language of performance: “Each party hereby consents to having any disputes arising out of this agreement, including any tort claims, resolved exclusively by arbitration administered by the American Arbitration Association … .” Do you like that better?
And regarding relating to, using it is like blindly firing a blunderbuss, just in case there’s something out there. The surer, more cautious approach would be to determine what issues one is concerned about and then address them with targeted language. Who knows, relating to might somehow work to one’s disfavor.
Ken
Instead of the relatively stilted “the parties shall cause” phrase, why not be direct: “the parties shall submit any dispute … to arbitration …”? I notice that the commercial rules suggest “submit to arbitration” when talking about existing dispute; I can’t see any reason why future disputes cannot be directed to arbitration similarly.
Richard
Ken
1. Yes, I like “consent” better than “shall cause”.
2. At the back of my mind are the English cases on exclusion clauses, where the judge has said, in effect, “your contract excludes liability in contract but not in [tort][negligence] [breach of statutory duty] [whatever else the judge can think of]”. For this reason, exclusion clauses often seek to exclude liability “whether arising in contract, tort (including negligence), breach of statutory duty or otherwise”. In other words, the draftsman is trying to broaden it out to absolutely everything, and to anticipate the unanticipatable (my new word of the day!)
I also have at the back of my mind that there is case law where the judge has held that “under the contract” (your “arising out of”) doesn’t cover non-contractual causes of action.
My view is that we must recognise that the court will interpret wording incredibly strictly if it is trying to find a way around that wording.
In this context, I am much happier with “or relating to” than with listing specific causes of action, eg tort. To take a perhaps bad example, is infringement of a patent a tort? Some people say it is, others are not so sure. Is breach of statutory duty a tort or another category. There are times when a scattergun approach is in the best interests of the client, even if isn’t elegant.
Mark, Richard: You’ll see that I overhauled my verb use to reflect your comments. I’m not sure that it’s helpful to use both language of discretion and language of performance to reflect the perspectives of both the party bringing the claim and the party subject to the claim, but I thought it worth airing it in public.
And Mark, I object not so much to relating to as to unthinking blanket use of it. I’ll explore this further in a blog post.
Ken
Ken,
If you’re proposing wording to the AAA, you might also consider emailing LCIA and SIAC as their clauses follow similar wording, although slightly better worded on the procedural aspects, e.g. no. of arbitrators.
Mark, you’re right about the case law on “under the contract” not covering non-contractual causes of action, although I can’t remember which one either! If I do, I’ll post the citation.
Best wishes,
Jonathan
Ken
I don’t think the exclusivity wording works. Arbitration is not the exclusive means of resolving the dispute. The parties may resolve the dispute through, for example, negotiation or by the agreed appointment of an expert. As I understand it, what you are really trying to say is that a party must not commence formal proceedings unless the party has first submitted the dispute to arbitration.
This notion is better expressed:
“Before commencing any action or court proceeding in respect of any dispute arising out of this agreement, including any tort claim, a party shall submit such dispute to…”
Also, why express “dispute” and “claim” in the plural. I was always taught to draft in the singular except where the plural is specifically called for. I can’t see any difference in meaning between “any dispute” and “any disputes” but the former avoids any argument that the clause does not apply except where there are multiple diputes (and is marginally briefer).
Adrian
Adrian’s comments have prompted me to look at the UK Arbitration Act 1996 http://www.opsi.gov.uk/acts/acts1996/ukpga_19960023_en_1
In essence, if the parties agree in writing to submit their dispute to arbitration, then the court should stay any legal proceedings with respect to that dispute (subject to some exceptions).
Therefore I think the clause should focus on the parties agreeing that disputes will be referred to arbitration, then (at least under English law) statute will define the extent to which the arbitration proceedings exclude court proceedings. I think I agree that “exclusive” is not appropriate, in view of the possibility of applications to the court in support of the arbitration process or by way of appeal.
Mark: But if you use language of discretion rather than language of obligation, you have to make it clear that a disgruntled party can’t go to court instead. Any suggestions? Ken
Well I fell into that one…
“The parties agree to submit any dispute arising under or in relation to this Agreement
to arbitration administered by the American Arbitration Association under its commercial arbitration rules. Judgment on the award rendered in any such arbitration may be entered in any court having jurisdiction.”
Plus some optional extras:
* Before commencing any arbitration proceedings, the parties shall seek to resolve their dispute amicably in accordance with the provisions of Clause [ ].
* nothing in this Agreement shall prevent or delay a party from seeking an interim remedy in any court of competent jurisdiction.
Mark: *shrill buzzer sounds* We don’t do agrees to. (See MSCD 2.58.) And anyway, here it’s functionally equivalent to shall, so it seems you’re backtracking. Are you really opting for language of obligation rather than some alternative?
Your first optional clause is, I think, unrelated to the current discussion. The utility of your second optional clause depends on where the principal language ends up.
Ken
Oh dear, I really fell into that one!
My original objection was to how the phrase “parties shall cause” read, which I think you cured in your redraft. I only said I preferred language of consent because that seemed better than the other choice being offered.
Although I don’t usually like “parties agree to”, I used that phrase because it tracked the language of the Arbitration Act 1996. Could this be an honourable exception to the usual rule, or at least a plea in mitigation?
I suppose there is an idea of the parties agreeing which outside body will have jurisdiction over them rather than agreeing to do something. I wonder whether this idea fits neatly into the obligation/consent distinction that you describe? Perhaps it does, I just haven’t thought long enough about it.
When drafting (court) jurisdiction clauses, the wording often includes a reference to the parties “submitting to the jurisdiction” of the relevant court. I think it is something like this when parties agree to arbitration. Is this language of consent? It feels similar but not quite the same.
There is a sense in which such language both binds the parties to one another and binds them to an external legal regime. There is an element of public as well as private law. Does this justify or excuse slightly different language?
I am in deeper than I can swim, so I had better stop there.
Mark: I track statute language only when I have no choice.
My “consent” and your notion of submission are analogous. I think that “consent” works better in this context, but I’ll mull it over. In any event, it’s not enough.
Thank you for helping to move things along. I’m hoping that someone who has some skin in this game will wade in.
Ken
Ken, I understand your reluctance toward the use of “shall,” but reading your proposed language from the viewpoint of a layperson there appears to be a conflict between “As the exclusive means” and “a party may submit.” “May” gives the impression the complaining party has another option not mentioned in the paragraph, and I can easily imagine disputes arising as a result of the perceived omission.
Joe: I’m seeking to express a variant on may only: it’s routine for a contract party to be given limited discretion. But I do suspect that this language could be improved. Ken
Ken,
You must keep in mind that Arbitration clauses are highly scrutinized by courts and deviations from standard wording, especially when proposed by an attorney, may be interpreted to be substantive deviations The reason that the AAA’s and ALL OTHER major international arbitration institutions have similar wording is because of how courts interpret arbitration clauses. The parties’ must clearly express their consent to give up remedies in court by settling all disputes via arbitration.
When deviating from a standard clause provided by an arbitration institution, there is a risk that a party will claim the arbitration clause is invalid and/or doesn’t encompass the scope of x claim because of the wording of the clause.
See:
Prima Paint corp v. Conklin Mfg Co 388 US 395 (the reason for the use of “any controversy or claim”)
In Fillite (Runcorn) Ltd. V Aqua-lift (a firm) (1989) 45 B.L.R. 27
Hi-fert v. Kiukiang Maritime carriers (1999) 2 Lloyd;s Rep. 782
Now to your specific changes and their problems:
“As the exclusive means of resolving any disputes arising out of this agreement, including any tort claims”
-“Arising out of” is good but I agree with Mark that this may miss some claims. Including tort claims doesn’t fix this as statutory claims are not necessarily included. The question is, why take the chance? If the parties want all claims, whatever they are to be arbitrated, then it is best to use a shotgun (the modern form of blunderbuss). If they parties want only specific types of claims to be arbitrated, then that requires much more attention.
– Disputes may not cover some “controversies” such as anti-trust claims. Again, why risk this?
“a party may submit any such dispute to arbitration administered by the American Arbitration Association under its commercial arbitration rules, and each party hereby consents to any such dispute being so submitted.”
First, and perhaps the most significant, problem is “may”. May is permissive, meaning that parties can choose NOT TO submit disputes to the AAA. This is a very easy target to indicate that the arbitration clause is not binding and only an option for the parties. Essentially, you risk losing the benefit of the arbitration clause by including “may.” (I know there is case law on this as well)
Second, “its commercial arbitration rules” does have consequences. One claim for invalidity is that the rules of a different institution are mentioned, therefore creating an invalid clause. I.e. if you use LCIA arbitration under “its commercial arbitration rules” and the arbitration is in the US, if a party does not want arbitration they will argue that commercial arbitration rules are the rules of the AAA and not the LCIA Rules, that the parties were confused and reached no agreement on this matter because the wording in the standard LCIA clause is clear, it refers to “LCIA Rules.” As a proponent of arbitration, I sincerely hope any such claim is immediately thrown out as useless, but then again, why risk it? Also, in some jurisdictions (i.e. China) there is a higher level a scrutiny given to arbitration clause and this type of difference may be enough to delay arbitration proceedings. The point is, why risk it, especially if you are an attorney. All the suggested clauses refer to the institution’s rules by name.
“and each party hereby consents to any such dispute being so submitted.”
As regarding a replacement for “shall,” this solution is much wordier and less clear.
Does not overcome the permissive nature of May. The issue is that parties may start litigation in state courts and this “arbitration” clause will be useless to stop it.
“Judgment on the award rendered in any such arbitration may be entered in any court having jurisdiction.”
“the award” is standard in many clauses but it arguably would not include interim awards. My suggestion is to use “any award” instead.
Additional issue:
“exclusive means” and “may” are at odds with each other. Why give a judge this fodder to deal with?
In conclusion, even if the arbitration clause is not invalidated and covers the claim the parties intended it to cover, your changes Ken, make the arbitration clause permissive and not mandatory. A party may not be able to stay litigation in state courts with this clause. At the very least, this clause has a decent chance of surviving summary judgment (even in the US), which increases the costs to the parties.
Jason: Thank you for taking the time to put together such a thorough response. Some thoughts:
Again, your first point is a variation on the this-is-tested-contract-language argument that’s been used for far too long to give cover to crappy drafting. I’m not buying it, or at least not until I’ve established that in this context there’s some rational reason for that approach. I will of course consult the cases you cite.
Regarding my further thoughts on relating to, see the blog item I’ll be posting tomorrow.
When used in conjunction with “exclusive,” the “may” poses no problems. But I might tinker with this.
Regarding the reference to the rules, all I did was remove the initial capitals! If my wording poses a problem, so does the AAA wording. In fact, I think neither poses a problem.
As I mentioned in my comments, the two-perspectives wording I used tracks wording one sees in jurisdiction provisions. The logic that applies to arbitration provisions should apply also to jurisdiction provisions, but I have yet to determine whether the two-perspectives approach is actually useful.
To sum up, the “magic words” approach, no matter how entrenched, is anathema to clear drafting. But this is a work in progress, assisted by input such as yours. Let’s see where it goes.
Ken
Thanks for the reply. I still disagree with some of your edits but the one that sticks out is your insistence on using may.
Your rationale for throwing out shall, that the parties may want to negotiate or settle a dispute instead of arbitrate it, is not convincing. The parties can always (with the possible exception of contracts required for government projects) negotiate and agree to something different. I.e. “X shall deliver Y to Z.” Y can be changed via mutual agreement to Q. This also applies for the use of shall in arbitration. The parties can always resolve disputes through negotiation, but the parties are required under the contract to resolve all disputes via arbitration. This does not mean that if the parties enter into a settlement agreement they are breaching the contract.
If you hate shall, perhaps you could rephrase the clause to be more active and do away with the may. Something like “the AAA has the exclusive jurisdiction over … and each party hereby consents to such jurisdiction.” I don’t like “jurisdiction,” but fix that and you can do away with may.
I like the inclusion of tort and statutory claims. However, a party should determine if it wants these claims arbitrated or not. The amount of damages available may be much different between arbitration and litigation (punitive damages are almost never available to a party in arbitration).
Jason: I promise I’m not insisting on shall! I think it’s a close call, and I’ll make up my mind soon. Ken
I am drafting an arbitration provision right this moment, and I got
stuck on the “may” as well. I now have “a party is entitled to demand”
but I’m not sure that’s sufficient. I think “shall” is better here, in large part because I’m persuaded by Jason’s “savings clause” notion: the parties can always agree on an intermediate step.
(Yes, I’m writing this 4 years later.)
Hmmm, I should have revisited this for the third edition. Next time!
"party may demand" — a party can demand anything without a contract saying so. Th langauge must be to the effect, rather, that such party can "compel" the resolution of the dipsute by arbitration.