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Your New Guide to Arbitration Clauses, Part I

By M. Scott DonaheyDecember 11, 2011 | Print

Complete article first published in the November 2011 issue of Alternatives to the High Cost of Litigation available online to current subscribers.


Clause Challenge

The issue: Your arbitration provisions need improvement and updating.

Problem solved: A veteran neutral sifts through several industries’ worth of clauses to come up with new standards for current ADR practice.

What’s covered? Here, a half-a-dozen variations on arbitrator selection. Next month, three baseball arbitration contract clause options. And still to come: Software development/installation; international patent/expedited, and construction.

Arbitration agreements are generally considered, if at all, as the last clause to be negotiated following protracted negotiations that have finally resulted in a commercial contract that both parties envision to be profitable. Neither side wants to spend a significant amount of time drafting and discussing a provision that may only serve to jeopardize the hard-won deal. Moreover, in these difficult economic times, in-house lawyers often are overworked and have neither the time nor the inclination to be creative.

Is it any wonder that the standard arbitration provision provided by one or another of the leading arbitral institutions finds its way into most commercial contracts? The standard clause, calling for the application of the institution’s arbitration rules and not much more, is readily available and non-controversial. Usually, the only negotiation involved generally turns on which institution to use, how many arbitrators to have, and where to hold the hearing.

It is only much later, after some time has been spent in performance of the agreement and after irreconcilable disputes have soured the commercial venture, that the parties employ the dispute resolution mechanism to which they have agreed. All too often they find that one size does not fit all. They find that the arbitration procedures that they have chosen either are taking far too long and costing far too much given the nature of the disputes which have arisen. Or they find that the procedures are altogether inadequate to deal with a dispute that is complex, technical, and whose resolution will have a major impact on each business’s balance sheet.

In-house lawyers and outside counsel negotiating a commercial dispute need a readily available menu of alternative arbitration provisions to fit the various types of ventures. The alternatives need to be appropriate to the particular disputes which are most likely to arise under the particular business arrangement that counsel are negotiating.

These articles will undertake to create and collect arbitration agreements and provisions that are tailored to disputes that are likely to arise under particular business relationships.

These clauses are not intended to be used in consumer or employment contracts and are intended for sophisticated entities of roughly equal bargaining power. This author uses the CPR Institute as the provider institution throughout these examples, since it can provide the assistance the parties request under the clauses. Other institutions also may be able to provide such services, but parties should make certain that their chosen institution is able and willing to provide the requested services. Adjustments likely would be needed in the clauses for different providers. [The CPR Institute is publisher, with John Wiley & Sons’ Jossey-Bass unit, of Alternatives.]

ON THE ARBITRATOR SELECTION PROCESS

One aspect of the arbitration that is perhaps the most important, but which is frequently given short shrift in institutional rules, is the selection of arbitrators. Nothing may be as important to the acceptance of an arbitral award as confidence in the arbitrators selected.

While there obviously is a potentially infinite number of ways in which a sole arbitrator or a three-person tribunal can be selected, this article presents six alternatives spread over three selection scenarios: (1) mutual interviews of the candidates for arbitrator, one in-person and one by telephone; (2) the traditional party-selection method, one for a three-person panel and one for the selection of a sole arbitrator; and, (3) a hybrid of party selection and institutional expertise in the selection of the arbitrators.

Options 1 and 2 are intended for cases in which a substantial amount of money is likely to be at stake and probably arises under a contract, or in which the case requires familiarity with a particular technology, experience with similar cases, knowledge of a particular area of law, or all three. In such a case, it is extremely important that the parties be as comfortable as possible with the qualifications, judgment, and personality of the arbitrator selected.

Optimally, the parties will interview the final candidates personally in a joint session as set out in Option 1. Where time, expense or other factors militate against a personal joint interview, a joint telephonic interview is the next best thing. This alternative is set out in Option 2. In either case, the parties may wish to provide the candidates with written questions in advance, the answers to which will be furnished to and reviewed by the parties before the interview.

Options 3 and 4 embody the traditional party selection process where the parties either (1) each select one of the three arbitrators that are to hear their case, and the two so selected agree upon a chair (Option 3), or (2) jointly select the sole arbitrator (Option 4). In the event that the parties cannot agree within the specified time frame, the institution will step in to select.

Options 5 and 6 are hybrids. They are designed for situations in which the parties want to exercise some say in who is to be selected as arbitrator, but ultimately wish to take advantage of the institution’s expertise in the selection of arbitrators best suited to the particular dispute.

Of course, another alternative not covered here is the traditional list method, followed by many arbitral institutions. In this process, the institution provides the parties with a list of names, usually 10, and the parties are asked to strike a given number of candidates, usually five, and to rank the remainder. Under that approach, the highest mutually ranked candidate will be the sole arbitrator.

* * *

Full article with detail and analysis of the six options is now available in the December 2011 issue of Alternatives, available electronically to current subscribers.

Next month, author Scott Donahey presents more form arbitration provisions, focusing on a modified baseball arbitration agreement. This article will be available only to subscribers of Alternatives.

AUTHOR’S CREDITS AND ACKNOWLEDGEMENTS

Author M. Scott Donahey, of Palo Alto, Calif., is a neutral focusing exclusively on domestic and international arbitration, mediation, and domain names under the Uniform Domain Name Dispute Resolution Act. He has more than 25 years experience in arbitrating complex commercial, intellectual property, and international commercial disputes; and has decided more than 150 commercial arbitration cases and more than 300 disputes under the UDRP. For more information, see www.scottdonahey.com.

Donahey acknowledges substantial help from both inside and outside counsel in various industries. In the areas of technology and intellectual property, where he focuses his arbitration practice, many of the provisions in these articles are borrowed from and often modified clauses that he says he has seen in contracts put before him in his arbitrations. These clauses most likely were drafted by in-house counsel for one or both of the parties, and as a result the drafters’ names are unknown to the arbitrator selected to follow the provisions. Donahey expresses his thanks to these “thoughtful and creative attorneys who practice in emerging and established pharmaceutical, biotechnology, Internet, and computer technology companies.”

In other industries, the author notes that the clauses have been suggested by experienced arbitrators who have encountered them in their practice. Donahey acknowledges the suggestions of James P. Groton, Susan Levy, Gerald Phillips, Tony Smith, D. C. Toedt III and Maretta Toedt. Special recognition must go to Charles Sink, adds Donahey, who supplied the basis for all of the clauses in the construction section, which will appear in a future issue.

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