Once parties fall into dispute over a contract they often naively assume that a standard arbitration clause will afford them a quick and inexpensive resolution of their differences. However, due to a number of inadequacies commonly found in “off the shelf” boilerplate provisions, their expectations sometimes become frustrated in ways that might have been avoided if the parties’ specific needs had been tailored with certain features. Based on “lessons learned” from many years of observing efforts to enforce them, there are many points which might be considered in the drafting process in an effort to limit these frustrations, and here are five of them.
1. Is arbitration truly the dispute resolution process which the parties want? Arbitrators, of course, do not have to follow the law exactly, they usually cannot be reversed even if they make glaring mistakes of fact, and they often tend to “split the baby” in ways which gives neither side a clean victory. See CCP § 1286.2. This could be a beneficial approach for some litigants, but others might prefer the alternative called a “judicial reference,” under which a court appointed Referee is required to follow the law and to adhere closely to the parties’ intent. See CCP § 640; Sy First Partnership v. Cheung (1999) 70 Cal.App.4th 1334. An additional advantage is that, by agreeing to waive selected parts of the statute which reserves all grounds available to reverse a court decision (CCP § 645), the precise grounds for post-hearing challenges to an award can be made can be rendered either broad or narrow as the parties may see fit.
2. A specific arbitration provider should be designated.This speeds up the selection process, and it essentially locks in a quality service employing a number of available arbitrators in whom the parties know they have trust. All arbitration providers are not the same, and many have significant turnovers in their ranks. Some are quite expensive and/or charge exorbitant sums for administrative fees or room charges. Deposit, continuance, and refund policies often become significant irritants as well.In designating a service provider, the parties will want to consider whether they prefer (and if the provider indeed even offers) someone experienced in a particular subject matter, or a retired judge, or perhaps someone without any legal training at all. Whether the arbitration service provider has a mediation capability (not the arbitrator, of course, but another panelist with a different skill set) is also a consideration, whether it is provided for in the contract or not.
3. The relative speed of the arbitration process can be hastened by including details on the process itself. For example, some boilerplate arbitration provisions call for a panel of three arbitrators rather than just one, but this can often be quite cumbersome and unnecessarily expensive. Delays can also result from disagreements over how an arbitrator is to be selected if the parties cannot agree on a particular individual (the default procedure of having the service provider itself appoint someone is often problematic because the result might be one of its weakest panelists). Additionally, specific deadlines for the selection of an arbitrator, limitations on the length of the arbitration hearing, and an outside date for the rendering of an ultimate award can be very useful in bringing the matter to a swift conclusion.
4. Discovery needs should be anticipated. If the arbitration clause does not itself address discovery needs, there may turn out to be very little at all (i.e., limited document exchanges but no depositions under certain rules of one prominent national arbitration service provider). Deposition discovery is often quite valuable but it also can be expensive, and so specific limits on the number and/or duration should be described in detail. Expert disclosure procedures can be set out, including limits on the number and/or areas of expertise, and less efficient discovery tools such as interrogatories can be eliminated.
5. A meaningful arbitration result can often be frustrated by the unavailability of parties who did not sign the contract containing the arbitration clause. If there are third parties who have not agreed to arbitration (for example, brokers or outside vendors) whose responsibility needs to be addressed before a global resolution can be achieved, then several approaches can be pre-engineered between the contracting parties. One is a covenant not to stay the arbitration pending the outcome of any future third party court action, and to cooperate in opposing any such efforts made by the third parties. Another idea is a commitment to arbitrate as many issues as possible despite the fact that a comprehensive resolution may not immediately result.
In sum, experience teaches that generalized reliance on boilerplate clauses borrowed from old form files or prior contracts may not be wise. Rather, careful thought should be given to the anticipated profile of future legal disputes over the specific provisions of a given contract, and prudent attention must be given in advance to the appropriate strategies under such expected scenarios. Positioning oneself in advance for these future battles when drafting the arbitration clause can save time and money. It will also most definitely increase the likelihood of an outcome which does not frustrate the parties’ expectations of an expeditious and economic arbitration process.