David K. Taylor, Bradley Arant Boult Cummings, Nashville, TN
There’s a great argument that lawyer advocacy in an arbitration is more essential than at a trial in court. This post is the beginning of the 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make in arbitrations, both when I served as counsel but primarily when I served as an arbitrator. Agreeing to arbitrate a dispute, whether in a contract or by agreement, is a serious decision for any business. There are pros and cons to binding arbitration versus trial in a court that go beyond a series of blog posts, but the fact is that when a dispute is arbitrated, finality is the rule. It is very difficult to appeal an arbitration award. In many instances, representing a party in an arbitration requires more due diligence and work than a trial. Great “arbitration” lawyering is therefore essential but many times does not happen.
Number 1: Mangling the Drafting of Binding Arbitration Clauses
Yes, this applies to your transactional lawyers as well as litigators. Arbitration is a matter of contract. Federal and state law allow for the enforcement of arbitration clauses. Courts now favor arbitration. There are plenty of articles out there on drafting arbitration clauses, but far too often drafters fail to consider the basics:
- What “rules” will apply to any arbitration, including key topics such as filing fees and the selection of the arbitrator(s)? You must read those rules before agreeing to have a “bet the business” dispute resolved via arbitration.
- What disputes will be subject to arbitration? “Any and all” disputes or only limited issues? Be careful not to create months and years of litigation arguing about the scope of an arbitration clause.
- Since discovery between parties (especially depositions) and third-party discovery is typically limited under most arbitration rules, what information will your client need in the event of a dispute and how will you get it?
- Will there be a condition precedent to the formal filing of an arbitration, such as going through a series of management meetings or even a mediation?
- Do you include pre-qualifications for the arbitrators, especially if the disputes are very industry specific?
- What about the venue for any hearings? It can be a tremendous advantage to have the hearing in your backyard with (typically) arbitrators who are local.
- Should you have one arbitrator or a panel of three (which can be very expensive but also can mitigate the risk of a “rogue” arbitrator)?
The time to consider the answers to questions like those above is before you sign the contract when you decide to include an arbitration clause. After a dispute has arisen, it is too late to renegotiate a poorly written arbitration clause.
The primary point is this: If the business decision is made to resolve disputes via arbitration versus court, it is vital to make sure that you draft a workable “clause” that makes sense considering the subject of the contract.