Four Tips for Improving Commercial Arbitration Clauses

By Philip M. Kelly and Nary Kim

A healthy debate exists in the legal industry as to which forum is the better option for dispute resolution:  arbitration or litigation in court.  Each forum comes with its own set of risks and rewards, including differences in the speed of resolution, confidentiality of the proceedings, cost savings, and quality of the judicial/arbitrator pool.

Assuming, however, that the parties prefer arbitration over litigation, additional considerations should factor into the negotiation and drafting of an arbitration clause to protect your or your client’s interests.  Because arbitration is a creature of contract, there are a number of ways to refine an arbitration clause to better suit your own needs.  Four of them are summarized below.

Scope of clause.  To begin with, you will want to weigh whether you want the language of the arbitration clause to be narrowly-confined to contract claims or broad enough to encompass all disputes (including tort and statutory claims) relating to the contract.  While California courts favor broad readings of arbitration clauses, some courts have signaled that subtle differences in the breadth of the language could dictate the type of claims covered by the clause.

For example, a clause that requires arbitration of any controversy “arising from” or “arising out of” a contract might be considered more restrictive than a clause that tacks on a broadening phrase like “… or relating to this contract” or “… or in connection with this contract.”  Thus, opting for a broadly-worded arbitration clause – such as one that applies to “any claim, dispute, or controversy relating to, connected with, or arising out of this contract or the subject matters of this contract, including without limitation any question regarding its existence or validity, and any challenge to the tribunal’s jurisdiction” – will enhance the likelihood that the clause will be enforced to compel the full range of potential claims to arbitration.

Size of panelIn addition, you will want to carefully consider the number of arbitrators to specify in the arbitration clause – one or three.  Arbitration before a three-person panel typically will be costlier and lengthier than arbitration before a single arbitrator because of the fees incurred by triple the number of arbitrators and a timeline dependent on the schedules of three persons, instead of one.  On the other hand, a three-person panel may increase the likelihood of a balanced decision-making process with less risk of bias against or sympathy in favor of one party.  Moreover, a three-person panel may be better equipped to evaluate a complex case and may lessen the risk of error by a single arbitrator.  If the parties decide to go with a single arbitrator, they still may reduce the risks of an erroneous final arbitration award by including an optional procedure to appeal the arbitration award to an arbitration tribunal.

Limits on discovery.  Another important consideration is whether to impose any limits on discovery in arbitration.  If cost savings is part of the motivation for arbitration, you may want to impose caps on discovery or eliminate certain types of discovery altogether.  For example, the parties could agree to forego depositions, limit the extent of e-discovery, or postpone all document disclosures until the time of the hearing.  If a goal, however, is to mitigate the risk of surprises at the hearing, you may prefer to allow the full panoply of discovery devices, to the same extent as would be available in litigation, or find a middle ground.

Availability of third-party discoveryA related consideration is whether to try to preserve the right to third-party discovery.  The Ninth Circuit recently has held that arbitrators do not have the power to compel third parties to produce documents prior to the arbitration hearing under the Federal Arbitration Act (“FAA”).  CVS Health Corp. v. Vividus, LLC, 878 F.3d 703, 708 (9th Cir., Dec. 21, 2017).  Thus, if third-party discovery is a tool that you believe would be advantageous in arbitration, the arbitration clause should specify that the California Arbitration Act, rather than the FAA, governs the parties’ discovery rights, and specifically reference California Code of Civil Procedure Section 1283.05 to try to retain the right to subpoena third parties for discovery.  A provision that the California Arbitration Act governs is not necessarily conclusive, however, as the FAA may preempt state law in cases that involve interstate commerce.  Under those circumstances, the Ninth Circuit’s limitation on third-party discovery is likely to control, regardless of whether the parties have indicated that the arbitration is governed by the California Arbitration Act.

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Increasingly, parties are choosing arbitration over litigation to save time and money.  By setting the correct parameters for scope, discovery, and the arbitration panel, you can ensure that the arbitration process gives you the cost-efficient forum that was bargained-for, without sacrificing all of the important protections that you would be entitled to in litigation.

2018-06-25T15:16:54+00:00