If you decide to agree to an arbitration clause, then you should carefully consider what issues you want to address in the clause. Below are some key points and provisions that should be considered when negotiating or drafting an arbitration clause.
1. Consider the Number of Arbitrators
Using only one arbitrator may be risky because the grounds to vacate an arbitration award are very narrow. You may be stuck with that arbitrator’s award, even if erroneous. To minimize this risk you may choose three arbitrators rather than one. This will reduce the risk of error, but substantially increase the cost.
2. Define the Procedural Rules
Many parties define their discovery rules and set limitations on depositions, interrogatories, and requests for production. This is desirable because it cuts costs. However, discovery limits are risky because one set of discovery limitations does not fit all disputes. For example, if you are a claimant in a large construction defect dispute, you may regret agreeing to limit discovery.
Likewise, many parties agree to apply the Federal Rules of Evidence. This is wise because it provides the parties with some measure of certainty regarding what rules apply and it enables the parties to use case law construing these rules for guidance.
3. The Scope
The scope (i.e., the universe of claims to be arbitrated) is arguably the most important issue. Surprisingly, this is a frequently litigated issue with respect to arbitration, so make sure the scope is clear (the AAA provides parties with a clause builder program). Most parties prefer a broad scope and use terms like “all claims arising out of or related to this Agreement.” Courts tend to construe such broadly worded arbitration clauses to include torts arising out of the subject matter of the contract.
4. Retain Judicial Relief
The arbitration clause should contain a carve out that explicitly allows you to seek injunctive relief and to foreclose your lien in a court because an arbitrator lacks the contempt power to enforce an injunction and cannot foreclose a lien. If you fail to retain any judicial remedies, your adversary may argue the arbitration clause has stripped the court of jurisdiction to enter such orders.
If the arbitration clause requires mediation as a condition precedent, consider striking that requirement. Mediation, in the right circumstances, is great tool to efficiently resolve a dispute. Naturally, it is popular. However, in many cases mediation at the outset of a dispute is not fruitful because the parties do not yet understand the strengths and weaknesses of their claims and/or defenses. Mediation typically makes more sense after the parties are allowed to conduct discovery and, therefore, are better able to assess liability and damages.