By Hon. Sharon Armstrong (Ret.)
and Richard Chernick
Commercial arbitration has become the dispute resolution process of choice for many businesses because the Federal Arbitration Act (FAA),1 as interpreted by the U.S. Supreme Court, assures parties that they may define their preferred dispute process in a transactional document and be confident that courts will enforce those choices.2 Moreover, institutional providers and arbitrators understand they are bound to honor parties’ agreements in administering and managing arbitrations.3
We address below practice tips that highlight those choices that are likely to enhance the quality, economy and reliability of the arbitration process. Carefully drafting the arbitration clause, embracing limited and focused discovery, and adopting efficient hearing procedures will assure a successful arbitration. In particular, care should be taken to make the negotiation of the arbitration clause more than an afterthought.4
Carefully Define the Scope of the Agreement To Arbitrate
Most arbitration clauses utilize the “all disputes arising out of or relating to ...” formulation that courts regard as a standard broad-form clause, which encompasses not just contractual but also related tort and statutory claims. Use the wrong formulation (“claims arising out of ...”) and you may lose the right to bring non-contractual claims.5
Similarly, be sure that all necessary parties to the likely arbitration are named in the clause (guarantors, third-party beneficiaries, corporate affiliates, etc.). Also consider a delegation clause so the arbitrator, rather than the court, will interpret the parties’ contractual intent to arbitrate.6
Identify the Institution and the Rules
If the clause is silent on this point, you may end up in a non-administered proceeding in which issues the institution would have easily addressed (such as compelling arbitration against a reluctant respondent or appointing arbitrators) instead require a court hearing.
Consider a Step ADR Clause
The arbitration clause can save costs by requiring negotiation or mediation in advance of arbitration. Include time limits so that the pre-arbitration process does not derail the efficiency of the arbitration itself. And avoid “good faith” negotiation requirements, which only engender fights over ancillary issues.
Use a Single Arbitrator
For all but the most complex cases, a single arbitrator is the best choice. If a panel is required, agree to delegate to the chair certain pre-hearing decisions, such as discovery disputes.
Specify the Governing Law
Unless you specify the governing law, the arbitrator will decide it for you. In contrast to state law requirements for choice of law, the law of arbitration does not prohibit choosing a law that is unrelated to the parties or the transaction (i.e., designating New York or Delaware substantive law where the transaction and the parties are all in Washington).
Parties are also free to substitute a state arbitration statute for the FAA, even where the transaction is “in commerce” (FAA § 2). But parties should avoid incorporating state or federal civil procedure rules in the arbitration clause because they will make the proceeding as cumbersome and expensive as court litigation. Instead, the clause should require use of the institution’s procedural rules.7
Specify the Venue
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