The only way to keep your disputes out of the court system is to set up something with the parties you do business with. The most reliable method is to place ADR language in all your business contracts and agreements. There are no rules about what language can and cannot be used other than it must be fair to both parties. Similarly, there is no perfect ADR clause.
Simplicity is nice, but clarity is better. For example, if an arbitration clause simply says the parties agree to submit any disputes to final and binding arbitration, too many issues are left open. Which arbitration organization (i.e. tribunal, such as AAA)? How are arbitrators selected? How many arbitrators? What system of laws does the arbitrator use? Where will it be located? How are expenses shared?
Ideally, your clause will settle these issues. Here are some clauses to consider:
□ Mediation, Arbitration or Both? Want to avoid the court system altogether? If so, you need a binding clause. You also may want a two-step resolution. First, stipulate that if the parties can work out their differences on their own in good faith, they must attempt to mediate. Mediation can be swift and less expensive than arbitration, and both parties maintain control of the resolution. But if resolution is not achieved by mediation, you may want your clause to stipulate that the parties will then submit to binding arbitration. The arbitrator’s decision is final.
□ Expenses. A well-drafted arbitration clause stipulates how expenses are divided. Though most parties choose to divide expenses equally, some expense items may not be divided. For example, if one party decides to have a court reporter transcribe the proceedings, should both parties pay? Also, if the plaintiff loses, should that party pay more of the expenses? Many choose to stipulate that each party bears its own expenses and splits the cost of any mediator and/or arbitrator.
□ Selection of Mediator, Arbitrator. For mediation, a single mediator is typical. But given the higher risk inherent in binding arbitration, you may want more carefully crafted terms for selecting an arbitrator. For example, to select a single mediator or arbitrator, each party could select one. The sole purpose of the two arbitrators is to select who will mediate the case. Sometimes, to reduce the risk and impact of a maverick arbiter, a three-person panel is desirable (but it comes at additional financial cost). The “third one chosen by the first two” method works well here, too. When multiple arbitrators are desired, an odd number makes more sense.
□ Qualifications of Professionals. Qualifications should be tailored for the type of dispute. If the agreement is contained in a purchase and sale agreement for a business, you may want an arbitrator to be an attorney, business broker or mergers-and-acquisitions professional with a minimum of (fill in the number of years here) years of experience in transactions involving purchase and sale of businesses. You also may want a mediator or arbitrator trained and certified by one of the main certifying organizations, such as the American Arbitration Association. Trained mediators and arbitrators are often lawyers but also may be accountants, architects, engineers, scientists, et al.
□ Discovery. How much discovery will be allowed? In what form: depositions, interrogatories, requests to produce documents, requests to admit, requests for inspection or physical examination? If discovery is allowed, for what period of time? Most tribunals such as AAA have limited rules on discovery. If you want discovery rules, you may want to develop your own or just include language that federal or state statutes will be used.
□ Scheduling. You may wish to stipulate when arbitration will occur, how swiftly the mediator or arbitrator will be selected, and any limit on the number of days that arbitration hearings will continue. This necessarily implies limits on the amount of time each party can have to present direct testimony as well as on the amount of time for cross-examination.
□ Privacy. You may want to include a confidentiality provision, keeping confidential any disputes, testimony, documents and outcomes involving the arbitrator. Consider as well the issue of remedy if this provision is violated. Many find this issue very complicated and remedy difficult to draft and enforce.
□ Role of Arbitrators. You may want to consider whether arbitrators also can serve as mediators (i.e., trying to settle the dispute through settlement negotiations), or whether the arbitrator’s role is strictly limited to deciding the disputes.
□ Rules of Evidence. In most arbitrations, there are no rules of evidence. The arbitrator has discretion to consider whatever evidence he or she wants. If you want something different, stipulate such in your arbitration agreement. For example, the attorney-client privilege is a right granted by federal and state courts, but such does not exist in most ADR tribunals. So, if you want to enjoy attorney-client privilege in your ADR, add such language to your ADR clauses.
□ Briefs. If you want to file pre-hearing or post-hearing briefs, provide for them in the arbitration agreement. You may want to require that each party prepare an opening letter brief, no more than three pages long, setting forth the parties’ positions at the outset of arbitration. You also may want to allow each party to submit briefs to the arbitrator(s) within (fill in the number of days here) a certain number of days after the close of arbitration hearings. Consider varying the number of briefs allowed depending on the dollar amount in controversy.
□ Decision format. Do you want a decision announced orally at the close of the arbitration hearing? Written with explanation of reasoning or written without explanation? Make sure it’s spelled out in your agreement.
□ Appeal-Enforcement. Arbitration awards generally are considered final and binding. If this is what you want, state it in your arbitration clause. But be aware that the courts still may get involved. For example, if one of the parties claims that the subject matter is outside the scope of the arbitration agreement (called substantive arbitrability) or if a party claims procedural arbitrability, meaning that appropriate arbitration procedures were not followed. Also, some courts have said that for disputing parties to use the court system to enforce an award agreed to in mediation or awarded in arbitration, ADR language must specifically say so. A well-drafted arbitration agreement sets forth the precise agreement of the parties on both substantive and procedural arbitrability.
□ Limit of Arbitrator’s Authority. Most statutes allow a court to set aside an award if the arbitrator exceeds his or her powers. A well-drafted arbitration clause defines the powers of the arbitrator. For example: the arbitrator shall have the authority to award compensatory damages. An award of punitive damages by an arbitrator, or an attempt by an arbitrator to issue an injunction, undoubtedly would exceed his or her authority under such a clause.
□ Choice of Law. Some parties want their ADR clause to specify that the law of a particular legal jurisdiction will be followed. Unless the arbitration agreement clearly indicates that the arbitrator’s judgment on the law of the jurisdiction shall be final and binding, such a clause invites a losing party to go to court to set aside the award because the arbitrator has misapplied the law. A well-drafted clause identifies the jurisdiction of law that applies to the contract and indicates whether the arbitrator’s judgment on questions of law shall be final and binding or subject to review in court.
□ Be Aware of Local Laws: For example, the Vermont Arbitration Act contains a significant trapdoor that parties can fall through if they are not careful. It provides that an agreement to arbitrate is not enforceable unless the parties sign a separate acknowledgment of Arbitration drafted in a certain manner. Always check local laws.
□ Provisional Remedies. Unless your clause allows a party to seek immediate yet temporary and preliminary relief from the courts, such as attachment, garnishment, or injunctive relief, you may find that your arbitration clause gives the arbitrator exclusive remedy. So consider whether you want your clause to allow provisional remedies from the courts while arbitration is pending.
□ Scope: The scope of issues that you want covered by the ADR clause should be stipulated. For example, does the ADR clause pertain only to specific disputes, such as those that directly arise from the subject contract, or all disputes relating to the contract, such as tort or statutory issues?
□ Remedy: Most arbitrators follow the general law and award compensatory damages, but as you craft your ADR clauses you should consider whether you want to allow the arbitrator to consider any just remedy or whether you want to limit the arbitrator in some way, such as providing limited damages only.
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□When drafting your own ADR clause, share this list with your lawyer. Consider as well the requirements of any applicable laws and consult other appropriate authorities. Always seek the advice of legal counsel.
Richard E. Coulson generously shared his expertise for the articles herein on ADR. Mr. Coulson is a recognized expert on mediation, arbitration and alternative dispute resolution (ADR). He is a Professor of Law Emeritus, active as a commercial arbitrator, and an independent legal scholar. You can reach him at rcoulson@okcu.edu
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
This publication is intended to provide general information on the subject matters covered. It is sold and distributed with the understanding that neither the publisher nor any distributor or advertiser is engaged in providing legal, tax, insurance, investment or other professional advice. The advice of a qualified professional should be sought before any reader applies a concept presented herein to his or her particular situation or business.
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