Editor's note: This is an edited excerpt from an article written by Ira Starr that appeared in the Summer 2022 edition of the Business Law Section Newsletter. View the full newsletter here. The standard arbitration clause, found in thousands of commercial and consumer contracts, will read something like “Disputes - Arbitration. Any dispute or controversy arising under or in connection with this agreement shall be settled exclusively by arbitration conducted by an arbitrator in the State of ______________ in accordance with the rules of the American Arbitration Association then in effect.”
To use a phrase that we all heard ad nauseum in law school, this clause contains numerous “traps for the unwary” to be discussed in this primer.
1. Location: The standard clause states that the arbitration will be conducted in “the State of ________________” – it doesn’t specify an exact location. In order to protect your client from potentially excessive additional travel expenses, as well as the inconvenience and expense of transporting witnesses and documents to a remote location, it is preferable (if not mandatory) that the exact location of the arbitration be specified in the agreement. Don’t rely on the principle of forum non conveniens.
2. Choice of law: While most contracts and agreements contain a “choice of law” clause (and that is perhaps the subject of another article), a definite choice of law provision should be incorporated into the arbitration clause in order to ensure that the opposition or the arbitrator doesn’t urge the application of the law (whether substantive or procedural) of a state which is adverse to your client’s position. The arbitration clause should specifically state that “the law of __________ shall be applied in any arbitration proceeding.”
3. Filing fees: The rules of the American Arbitration Association (AAA), as well as most other arbitration sponsoring organizations, provide that the claimant is initially responsible for payment of any requisite filing fees. As an inducement to settlement rather than filing, it is often helpful to insert in the arbitration clause that initial filing fees shall be paid equally at the time of filing (irrespective of subsequent award of costs and fees, discussed below).
4. Setting the first hearing date: We have all heard the advertisement that arbitration is faster than using the judicial system – in this author’s experience that is true no more than 50% of the time (or 60% or 40% – whatever you choose). The rules of most arbitration agencies will generally provide for a fairly prompt initial hearing, but it is good practice to incorporate a requirement in the arbitration clause that the arbitrator must be chosen within 30 days of the initial filing and the initial hearing MUST be scheduled within 30 days of the appointment of an arbitrator.
5. Discovery: One of the most advertised “advantages” of arbitration (another potential future article) is that you save money because you don’t go through expensive depositions and discovery demands. Nevertheless, in order to preserve your options in the event the ultimate dispute requires depositions or other discovery, try to incorporate in the arbitration clause the ability to conduct depositions. If the opposition is “big business” and if you push hard enough, it is likely that you will get some concession on the point, which of course can be waived at the time the arbitration is filed.
6. Stenographic record: The rules of most arbitration sponsoring organizations do not require that a stenographic record (or other forms of recording) be used in arbitration. Nevertheless, in order to preserve your rights in the event your ultimate dispute requires it, the arbitration clause should include a requirement that either party can require a recording system for all or part of the proceeding, with the requesting party responsible for the up-front cost.
7. Award of fees and costs: Again, the rules of most arbitration sponsoring organizations give the arbitrator the power to award costs and fees, but they do not mandate it. In my opinion, the requirement that the arbitrator award fees and costs is the most effective settlement tool available. Accordingly, the arbitration clause should certainly incorporate that requirement.
8. Final opinion (timing and content): In order to avoid the agony of waiting for the arbitrator’s decision, the arbitration clause should require: (a) that the final decision incorporate findings of fact and conclusions of law in order to facilitate any appeal of the decision (however difficult); (b) a specific award; (c) allocation of fees and costs; and (d) that the arbitrator’s decision be rendered within 30 days of the final hearing.
Of course, the list of items to be incorporated in the arbitration clause can, and should be, expanded depending on the needs of the particular client and the circumstances of the particular contract.