If you’re a fan of the litigation-versus-arbitration debate, you’ll find of interest this article on law.com. It’s from the Legal Intelligencer, and it’s by Gina Passarella.
The title says it all: “Litigators Losing Love of Arbitration Argue for Trials.” But what caught my eye was the suggestions made by those interviewed for the article regarding how you can attempt to limit any downside to arbitration by addressing certain issues in the arbitration provisions:
- require a nonjury trial in the event of a dispute, or at least specify a certain jurisdiction, preferably in federal court
- specify the number of hours or days each side will get to present their case
- limit the number of depositions each side is allowed, when documents should be turned over, and how many days of testimony there should be
- specify that the losing party pays for the other side’s costs
These suggestions serve as a reminder that whatever arbitration clause you use—the AAA standard arbitration clause, my redraft of it (see this PDF of my article on the subject), or something else—commentators on arbitration generally recommend that you supplement it.
But don’t expect unanimity on that score. One of those interviewed for Passarella’s article said that he doesn’t think it’s a good idea for clients to tailor their arbitration clauses to set some ground rules.
And don’t expect consensus on the pros and cons of arbitration. I’ve seen other articles suggesting that arbitration is becoming more trouble than it’s worth; see for example this 2007 New York Law Journal article. But I also recall seeing this more-upbeat 2006 article from the Daily Business Review.
6 thoughts on “Tweaking Your Arbitration Clause”
The basic problem is that contract drafters are (not unreasonably) reluctant to get too specific about a future situation, when they're not really sure what their clients will want in the event. So, they conclude, better to say nothing and let the chips fall where they may.
Limiting discovery ahead of time is very difficult to do during, let alone ahead of, the arbitration. Yet, the biggest problem, cost wise, with Arbitration is the growing acceptance of US discovery practice. The consensus is that Arbitration is just as expensive as litigation and, generally, produces unchallengeable results. The results vary, but there is criticism that since there is no check on the accuracy of such results (no appeal), some results are way off mark. Those that have been on the receiving end of these types of rulings have begin to shun arbitration. For example, an attorney mentioned that an arbitral tribunal applied an European approach to the doctrine of good faith when a US state law was the governing law in the contract. The result was bad (for her client) and, at least according to her, completely unsupported by case law.
However, contract drafters do need to be wary of drafting ineffective arbitration clauses. Using the above example, if a drafter tried to draft a clause to allow for appeal in a state court, this allowance may invalidate the arbitration clause altogether.
The complexity introduced by changing the rules likely outstrips the value added very quickly. Trying to negotiate those provisions will likely add significant transactional costs up front if the parties are both sophisticated (and one party is not in a position of great strength). Among other things, a party trying to negotiate limits on things like discovery and depositions will certainly raise red flags for the other side. In fact, I'd say that the party asking for those clauses think generally it's good for them and bad for the other guy. Unless you have some thorough advice to client in the file, changing amount of discovery and depositions could very well change the entire face of a client's result.**
Even for something simple like attorney's fees, I rarely advise clients to accept (or include) loser pays clauses unless I can be certain that they're likely to be good guys in a transaction with little or no change for actual breach (e.g., a passive licensor of software). If I can't then the consequence of their breach can become very expensive, very fast. And even if I think they benefit my client, they're still painstakingly reviewed and lots of advice goes to the client along the lines of: be good!
My guess is that in real negotiations, items like # 2 and 3 are the first things that get removed from a draft agreement and are never mentioned again. I don't see either party pulling the plug on a deal simply because they were unable to limit depositions or discovery–as regards the related topic, this might be an example of litigators not being good at doing deals.
With respect to those things in #1, they are pretty ordinary fare for most contracts and are at least discussed in most negotiations anyway (arbitration or not). I don't see that being a shock.
** I should point out that there may be circumstances in which such truncated or abbreviated rules should apply. For instance, it may make sense if the dispute is about fees owed (even royalties, equity, etc.) to have short, simple, sweet dispute resolution; the winner is usually pretty obvious. However, claims of bad faith, fraud, breach of confidence, and so on are less susceptible to such limits. The game you risk is being over or under inclusive.
Great article. I think it's funny how so many arbitration articles came up this week – the law.com article you mentioned, a WSJ article, one over at the Louisiana Construction Law Blog, and the one I just posted this morning: How To Make Arbitration Worth It Again. (referencing your post).
The long and short of what everyone has said is this: There are pros and cons to arbitration, you can mitigate some of the cons by supplementing your arbitration clauses with things that work for you.
It's a great point. With all the commentary about arbitration this week – it's clear that the arbitration process needs tailoring, or it'll turn you into a critic.
Another drawback of arbitration — joinder. The AIA form of arbitration clause used to (and for all I know the current version still may) require the owner to arbitrate separately with each potential defendant. That’s an invitation to disaster, as each trade contractor tries to pin the blame on a non-party who is not there to defend itself and is not bound by the result. If I couldn’t strike the arbitration clause, I always modified it to let me join all necessary parties and to remove the case to court if a necessary party was not subject to arbitration.
I imagine the result when applying your approach is that most disputes will end up in court, which must be your objective. You'd probably be safer just picking a jurisdiction and foregoing the arbitration all together. Remember, if you first have to form an arbitral tribunal to determine if there is a "necessary" party to be joined, then the TRIBUNAL will make that decision. Lots of critics have horror stories when it comes to tribunals voluntarily finding that they do not have jurisdiction to decide a dispute.