DRAFTING EFFECTIVE ARBITRATION CLAUSES
FOR CRITICAL BUSINESS TRANSACTIONS

California State Bar Section Educational Institute, January 25, 2004

Checklist to consider in drafting business related ADR clauses:

·        Broad verses Narrow Clause?

“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the _______ 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.”

Ø        “Risks” of self-administered arbitrations

Ø      Multi-step clause with mediation then arbitration?

·        Should all disputes be arbitrable?

Ø      What, if anything, should be excluded? 

Ø      Injunctive/Provisional relief for federal issues?

Ø      Who decides arbitrability issues?

Ø      Will court action be necessary to “clarify” scope of what is arbitrable?

·        Will the clause be self-enforcing?

Ø      Is it merely an “Agreement to Agree?”

Ø      Participation in the proceedings constitute a waiver of non-self-enforcing clause?

·        Will the clause clearly state what arbitral rules will apply?

Ø      Are all the rules appropriate for “your” dispute?

Ø      Specialized rules of the arbitral provider?

Ø      Should the rules be tailored?

·        How/who will decide the number and composition of the arbitration panel?

Ø      Pro/Cons of using/providing a “named” arbitrator in the clause—sunset/unavailability provision?

Ø      Do “you” only want 1 arbitrator?

Ø      Subject matter expertise important?

Ø      Due-Diligence on arbitrator selection?

Ø      Party-Appointed Arbitrators?

ü      Neutral verses non-neutral arbitrators

·        Any “significant” procedural issues that should/not be addressed in clause?

Ø      Class Actions or additional parties?

Ø      Discovery permitted and, if so, permitted scope?

ü      Clients want less discovery by selection of arbitration?  See 2003 AAA “Dispute-Wise Management®--Improving Economic and Non-Economic Outcomes In Managing Business Conflicts” Report

Ø      Who can/should sign/issue subpoenas for discovery?

·        Where will the arbitration take place—venue?

Ø      Will the specified venue control?

Ø      Will/should the arbitral association make a binding decision on locale?

ü      Will enforceability of venue provision be an issue?

Ø      Will any State statute “control” venue question notwithstanding contract provision providing for venue?  See, e.g. Cal. B&P Code §20040.5

ü      Role of Federal Arbitration Act (FAA)?

·        Fees, Costs, Attorney Fees Recovered?

Ø      See Leamon v. Krajkiewcz,  (F038025, Calif. Ct. of Appeals, Fifth District, filed 2/24/2003), compliance with contractual pre-arbitration provision, i.e. mediation, required in order to obtain attorney fees?

·        Choice of law for contract verses choice of law for arbitration provision

·        Should/does the clause “require” the arbitrator to “follow the law?”

Ø      “Manifest Disregard of the Law” standard?

Ø      Grounds for appeal in contract?

·        Other drafting concerns.

Ø      Bar punitive damages?

Ø      Prohibit joinder of parties?

Ø      Reasoned award required from arbitrator(s)?

·        Any clause enforcement issues?

Ø      Unconscionability—Fairness

Ø      Applicability of Contract defenses

Ø      Severability

Ø      Preemption—FAA?

Does the California Judicial Council Arbitration related rules on disclosure/disqualification, etc. “trump” the FAA?  (See Jevne v. Cal. Superior Court (JB Oxford Holdings, Inc.) - filed November 19, 2003, Second District, Div. Seven and ”Stock Answer to Ethics Spat,” ABA Journal, March 2003, page 14)

·        Specific concerns in drafting that are unique to the nature/business of dispute?

Ø      Employment/Discrimination

Ø      Entertainment

Ø      Franchise

Ø      Baseball Arbitration desired to “ensure” negotiated/mediated solution?

See American Arbitration Association “Drafting Dispute Resolution Clauses—A Practical Guide.”  Also, visit the AAA website at www.adr.org.