Creating an Effective Dispute Resolution Clause

Rules of the Road in Drafting an Arbitration Clause

Dixon Dern, Carl Ingwalson, Kimberly Moore, and Charles E. Rumbaugh

            NCMA Congress 2005

          Phoenix, Arizona


Any successful business relationship, whether in government or commercial contracting, “must” address how the post-negotiation, resolution of conflicts, disagreements, or disputes will be decided, i.e. the “default” mode on how they will be resolved.  This interactive panel session will have as its focal point the critical tools/considerations, or rules-of-the-road, in drafting an effective Alternative Dispute Resolution (ADR) clause for prime/subcontracts at all tiers.   The Contracts/Subcontract professional will be provided the latest arbitration clause “checklist” for the development and drafting of an effective ADR clause for inclusion in a government/commercial contract or purchase order.   The various facets of that checklist (pro/con) will be provided in this session. 

Overview of the session…

·        Multi-step dispute resolution clause, e.g. mediation and then arbitration

·        Scope of arbitration clause:  Broad verses Narrow

·        Should all disputes be arbitrable?

·        Clause “self-enforcing”?

·        Does the clause clearly provide applicable arbitral rules?

·        Number/composition of the arbitration panel?

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

·        Importance of arbitration location—venue

·        Fees, Costs, Attorney Fees Recovered?

·        Choice of law issues

·        Grounds to Appeal an Award

·        Any clause enforcement issues?

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


Specific Items/Checklist to consider in drafting business related Arbitration clauses

Initial or multi‑step ADR clause with mediation and then arbitration or litigation?

·        American Arbitration Association’s Dispute‑WiseSM Report

·        Aerospace/Defense Industry Dispute Resolution Commitment

·        Air Force/Industry ADR Corporate/ADR Commitment

·        CPR Corporate Policy Statement on ALTERNATIVES TO LITIGATION©


Broad verses Narrow Clause?

·        Standard :  “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      “All claims/controversies between the parties”

Ø      “Any transaction involving the parties prior to____ or subsequent to____ and arising in connection with_____.”

Ø      Mock arbitrations

Ø      Non‑binding arbitrations

Should all disputes be arbitrable?

·        What, if anything, should be excluded? 

Ø      Federal court issues?

Ø      Copyrights?

Ø      Antitrust claims?

Ø      Other?

Ø      Injunctive/Provisional relief for federal issues?

·        Who decides arbitrability issues - court, arbitrator, or specified in ADR clause?

                  “Validity, etc.” of the arbitration clause within the jurisdiction of the arbitrator?

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

Will the clause be self‑enforcing?

·        Is it merely an “Agreement to Agree?”

·        Participation in the arbitration proceedings constitute a waiver of non‑self‑enforcing clause?

Will the clause clearly state what arbitral rules will apply?

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

·        Specialized rules of the arbitral provider?

·        Should the rules be tailored?

·        Risk and costs of “self‑administered arbitration”?

·        What version/date of the selected arbitral rules will apply?

                  Those in effect at time of “demand” or at time of execution of ADR agreement?

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

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

·        Do “you” only want 1 arbitrator?

·        Complex case involving 3 arbitrators?

·        Subject matter expertise important?

·        Due‑Diligence on arbitrator selection?

·        Party‑Appointed Arbitrators?

                    Neutral verses non‑neutral arbitrators—new Commercial Code of Ethics 

·        Cost considerations

·        Qualification/Disqualification of arbitrator(s)

      Azteca Construction v ADR Consulting, (Cal. App. 4th August 25, 2004)—Effect of

            State Rules on Arbitrator Qualification.

                  Able to “draft around” holding?  Effect of Federal Arbitration Act (FAA)?

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

·        Class Actions or additional parties?

·        Discovery permitted and, if so, permitted scope?

      Clients want less discovery by selection of arbitration?  See 2003 American

            Arbitration Association’s Dispute‑WiseSM Report - noted above

                  Who can/should sign/issue subpoenas for discovery?

                  Motions for Summary Judgment impacted by having a discovery provision in the

                        arbitration clause?

Where will the arbitration take place—venue?

·        Will the specified venue control?

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

                  Will enforceability of venue provision be an issue?

                  Is “Unconscionability” an issue?

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

                   Role of Federal Arbitration Act (FAA)?

Fees, Costs, Attorney Fees Recovered?

·        Is there a need for compliance with contractual pre‑arbitration provision, i.e. mediation, in order to obtain attorney fees?

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

·        Will the arbitration law of a particular state apply or will the FAA apply?

·        Generic verses Specific choice of law

Grounds to Appeal an Award—should/can it be in the contract?

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

·        “Manifest Disregard of the Law” standard only in Federal cases?

Other drafting concerns

·        Limit remedies of the parties?

·        Bar punitive damages?

·        Prohibit joinder/consolidation of parties?

                  “Program/project” clause?

                  Prime contractor and all subcontractors?

·        Reasoned award required from arbitrator(s)?

·        International Disputes‑‑ Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”)

Any clause enforcement issues?

·        Unconscionability—Fairness

·        Applicability of Contract defenses

·        Severability

·        Preemption—FAA?

                  For example, does the California Judicial Council Arbitration related rules on

                        disclosure/disqualification, etc. "trump" the FAA—see above?

      Rules of NASD

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

·        Subcontract disputes—continue performing notwithstanding a dispute?

·        Payment or Letters of Credit

Common problem areas

·        No fail safe clause

·        Misuse of terminology

·        Specifying the impossible

·        Segregating “large” from “small” disputes

·        Unconscionability (procedural and substantive)

·        Party Arbitrators

·        Conditions precedent

·        Not specifying a provider

·        Micro-managing the process

·        Illusory provision

Kimberly Moore         Dixon Dern                     Carl Ingwalson          Charles Rumbaugh