How Do I Arbitrate Effectively?
The best time to agree on a sensible way to resolve a contractual dispute is when parties are negotiating their business agreement, before any dispute has arisen. A cooperative atmosphere typically prevails at that juncture, so that agreeing on rational, fair dispute resolution procedures can be built into the negotiating process. Once disputes erupt, it can be much more difficult for parties to agree about anything. (CPR Model Clauses and Sample Language)
i) Model Clauses
- 1. Traditional
- 2. Bounded
- 3. Final-Offer
- 4. Nonbinding
ii) Drafting Issues Checklist
iii) Building ADR Systems
i) Practice Areas
- 1. Employment Generally
- 2. Construction
- 3. Patents and Trademarks
- 4. Financial Services
- 5. Commitments
The process the parties choose will affect the outcome of the dispute. Identification of the likely nature of any significant future disputes that could arise under a particular contract is among the initial steps in dispute resolution clause drafting . . . An effective and simple rule of drafting dispute resolution clauses is to start with the sample clauses and customize them for a particular transaction at hand. (CPR Model Clauses) However, parties should avoid customizing clauses that trigger and enforce arbitration, as precise language is essential.
i) Model Clauses
Crafted prior to a dispute, contract clauses can protect business interests and provide a means by which parties can avoid the potential hazards of litigation. (
(1) Traditional Arbitration generally is a private, adversarial process in which a non-judicial adjudicator(s) renders a binding decision after hearing the parties’ presentation of evidence and arguments. In a business-to-business context, the use of arbitration generally occurs pursuant to a contract clause. Unlike a lower court judgment, arbitral awards typically have a high level of finality because a court can vacate or modify them only under very limited circumstances.
(CPR Model Clauses)
(2) Bounded Under this variation, the parties set a range for the award. An award over the high amount is reduced to that amount; and award under the low amount is increased to that amount; and any award within the range is not adjusted. High-low arbitration has been used in third-party insurance claims where liability is admitted, but damages are in issue. (CPR Model Clauses)
(3) Final-Offer This variation of arbitration entails each party providing a proposed monetary amount for the claim to the arbitrator(s) prior to the close of the hearings. At conclusion of the hearing, the arbitrator(s) will adopt one of the proposed amounts in the award. This form of arbitration is used in baseball salary negotiations. A related variation, often referred to as “Night Baseball” arbitration, occurs when the arbitrator(s) is not informed of the written proposals. Instead, the arbitrator(s) renders the award, which is then adjusted to conform to the closest of the parties’ proposals. Both variations eliminate an arbitrator’s ability to render compromise awards. (CPR Model Clauses)
(4) Nonbinding Although arbitration is typically associated with a binding outcome, there does exist the variation where the final ruling is nonbinding. Parties may consider this option when they seek an evaluation of their claim(s) to assist in negotiating a resolution. If a contract clause provides for such variation, drafters should address whether the nonbinding arbitral decision may be entered into evidence in any subsequent binding arbitration, litigation or other dispute resolution proceeding.
(CPR Model Clauses)
ii) Drafting Issues Checklist (Content from Drafting Dispute Resolution Clauses)
The arbitration checklist is divided into five parts — General Structure, Arbitrator(s), Proceeding, Award and Other.
(1) General Structure
(a) Scope For a pre-dispute clause, the range of disputes that will be subject to the arbitration clause needs to be addressed.
(b) Parties When drafting a pre-dispute clause the following should consider: Non-signatories, Consolidation, Multiple Parties and Contracts, and the Legal Capacity of the Parties to Arbitrate.
(c) Institutional Arbitration Rules Incorporation of a set of institutional rules streamlines the clause drafting process. Various institutions have promulgated such arbitration rules. For domestic arbitrations, AAA, JAMS, and CPR are leading examples, with CPR providing for ad hoc or self-administered arbitration and the others for fully administered proceedings. For international arbitrations, rules of the International Chamber of Commerce (ICC), ICDR, London Court of International Arbitration (LCIA), United Nations Commission n International Trade (UNCITRAL) and CPR are examples, with several providing for fully administered proceedings (e.g. ICC, ICDRA, LCIA) and two providing for ad hoc proceedings (e.g. Uncitral, CPR). A comparison of the different provisions of each institution’s arbitration rules is necessary to make and informed selection.
(d) The FAA and State Counterparts Arbitrations in the United States of domestic commercial disputes can be governed by the Federal Arbitration Act… or state arbitration laws, and federal or state common law principles concerning the enforcement of arbitration agreements and arbitral awards… To the extent state arbitration acts, or other state laws, conflict with the purpose of the FAA, the federal act generally preempts the state law.
(e) Location As a basic element of dispute planning, parties should designate the site of arbitration in their agreement. For domestic commercial arbitrations, although site selection generally is not as critical as in international arbitrations, important consequences can flow from such selection.
(a) Selection Process and Challenges There are various methods used to select an arbitrator(s). Drafters may choose from one the processes identified in the operative institutional arbitration rules; not identify any process and rely upon any default process under the applicable institutional arbitration rules; create their own method; or rely upon a method identified in any relevant statute.
(b) Neutrality and Impartiality of Arbitrators The operative institutional rules typically contain provisions relating to the impartiality standards of arbitrators... These provisions may be supplemented by applicable ethical codes and standards and by clause language.
(c) Pool of Arbitrator Candidates The operative institutional rules often contain provisions regarding the pool or arbitrator candidates... If drafters seek to specify further particulars on the pool of candidates, or to modify those contained in the adopted institutional rules, language can be added to the clause that so provides.
(d) Jurisdictional Issues When drafting an arbitration clause, drafters need to consider how a jurisdictional challenge will be handled. Such challenges include a party’s contention that the arbitration provision is not valid or it does not encompass the particular dispute at hand.
(a) Commencement of Notice The operative institutional arbitration rules typically specify how to commence an arbitration. Notice provisions are also addressed. Drafters can modify the commencement procedures in the clause if they are not appropriate for the transaction or parties at hand.
(b) Provisional and Interim Relief An arbitrator’s authority to issue provisional relief is usually addressed in the governing institutional arbitration rules... Drafters can also address the need for provisional relief if they do not wish to rely upon the provisions in the governing institutional arbitration rules.
(c) Choice of Law Issues Business parties typically include a general choice-of-law clause in any contract to govern the interpretation and enforcement of the contract... Separate and apart from a contract’s general choice-of-law clause is the issue of what law governs the interpretation and enforcement of the arbitration clause.
(d) Confidentiality Confidentiality in arbitration often may be as (or more) important to a party than speed or cost considerations. However, in the absence of a specific confidentiality provision in the arbitration clause or operative institutional arbitration rules, the legal basis for requirement of confidentiality is clear.
(e) Discovery Unlike litigation where discovery is prescribed by rule or statute, in arbitration discovery requires planning by the parties, either in the clause in advance of the dispute or in a separate agreement after the dispute occurs.
(f) Rules of Evidence and Privileges If the operative institutional rules do not specifically address privileges, the drafters should consider whether such language is needed. As a general rule, arbitrator(s) are not required to apply the rules of evidence, including privileges, in the course of the proceeding.
(g) Time Limits for Completion of the Arbitration Process In a pre-dispute clause, it is difficult to set realistic limits for when the arbitration proceeding should be completed because the nature of the dispute is largely unknown at that stage. The best assurance of an expeditious proceeding is the selection of an experienced arbitrator or panel chair who is able to manage the process efficiently.
(a) Remedies and Costs/Fees The operative institutional arbitration rules typically have provisions relating to the scope of remedies that the arbitrator(s) can award.
(b) “Bare” or “Reasoned” Award Institutional arbitration rules often have provisions addressing whether a reasoned or bare award will be issued.
(c) Finality of Award- Options for Modified Review Standards Historically, courts have taken a very narrow approach to reviewing arbitral awards under the FAA and state arbitration law counterparts . . . The almost ironclad finality of an arbitral award has been a hallmark of arbitration. The award’s finality strengthens other heralded features of arbitration, including faster resolution of a dispute and cost savings compared to litigation. Nonetheless, some business parties have sought contractually to expand the scope of judicial review. Corporate philosophy, a bad experience with arbitration, or extremely high stakes may encourage a party to consider expansion of review beyond the narrow grounds provided under black letter law.
(d) Consent-to-Judgment Clause To ensure enforcement of an arbitral award, the clause should contain a consent-to-judgment provision.
(e) Precedential Effect of Award Historically, arbitral awards have not generally been given res judicata or collateral estoppel effect by courts. Recent decisions exist, however, in which courts have granted res judicata effects to an arbitral award.
(a) Continuing Performance Parties may seek to provide in the arbitration clause that performance of the contract will continue, if feasible, while the arbitration proceeding is occurring.
(b) Right of Termination Drafters may consider language, if necessary, that provides the requirements of this Article shall not be deemed a waiver of any right of termination under this contract.
(c) One-Way Clause A one-way agreement to arbitrate exists when party A is obligated to arbitrate a claim it brings against B, however, party B is not so obligated. Instead, Party B may choose to litigate or arbitrate a claim against A.
(d) Note on Consumer/Employee Issues When drafting any predispute arbitration clause involving consumers or employees, counsel should thoroughly research the rapidly developing case law and applicable federal and state statutes.
(e) Clause Enforcement In a multi-step clause that provides for negotiation or mediation, or other nonbinding process, prior to arbitration, a party can be confronted with a court challenge if the prior dispute resolution process has not been satisfied.
iii) Building ADR Systems Before a dispute arises, organizations can take steps and build-in processes to mitigate their risks.
ADR SYSTEMS DESIGN: Effective ADR systems design is the cornerstone of any efficient dispute management and prevention program. To assist you, CPR offers two manuals which outline the best system design practices to institutionalize ADR:
- Building ADR into the Corporate Law Department: ADR Systems Design, highlights the best practices in corporate ADR systems design and profiles ADR programs at 23 major corporations and includes tools and forms employed by several leading companies, including BASF, GE, and Motorola.
- Building ADR into the Law Firm: ADR Systems Design, addresses law firm concerts about the economic viability of ADR and catalogues best practices in the use of ADR by leading law firms and includes useful practice tools and forms.
THE ADR PLEDGE: The ADR Pledge is a statement of policy aimed at encouraging greater use of flexible, creative and constructive approaches in resolving business-related disputes. It promotes systematic, early resolution and establishes a flexible framework for helping to resolve complex multi-party disputes. Clearly articulated and broadly communicated, the Pledge can be an effective way to initiate processes to resolve conflicts in straightforward and constructive ways, to yield better resolutions, and to control risks and expenditures of time and money. >Learn more
EARLY CASE ASSESSMENT (ECA): ECA is a conflict management process designed to facilitate more informed and expedited decision-making at the early stages of a dispute. these Guidelines focus on evaluating the dispute so that an appropriate strategy can be formulated, whether that is settlement, full-bore litigation, or something in between, with an eye toward reducing or eliminating disputes as soon and as inexpensively as possible. CPR offers an Early Case Assessment Toolkit to assist in this process. >Learn more
ECONOMICAL LITIGATION AGREEMENT (ELA): A means of containing civil litigation costs, an ELA is a hybrid of civil litigation and arbitration, where parties agree to use finite, defined and proportional discovery procedures in lieu of conventional discovery. Companies can incorporate the model agreement by reference into contracts with partners, suppliers and other B2B customers at the start of a business relationship. CPR offers a model agreement and guidelines for implementing this pre-dispute tool. >Learn more
iv) Training Throughout the year, CPR offers a number of pre-scheduled trainings at the CPR Institute or in conjunction with other events or organizations. They are led by acknowledged subject-matter experts employ an interactive format, and provide practical understanding and application of ADR tactics.
i) Practice Areas
(1) Employment Generally Employers have not only established formal employment dispute resolution programs but, increasingly, are gathering empirical data to assist in evaluating the effectiveness of such programs. A pattern of common attributes seems to be evolving among programs adopted by many leading employers, providing possible models for other companies. (How Companies Manage Employment Disputes)
(3) Patents and Trademarks
(4) Financial Services
(a) Banking Industry
(i) CPR has drafted a means by which corporations and law firms in the banking industry can commit to trying ADR procedures before moving to full-scale litigation. This Pledge is called the CPR Banking Industry Dispute Resolution Commitment.
(b) Chemical Industry
(i) CPR has drafted a means by which corporations and law firms in the chemical industry can commit to trying ADR procedures before moving to full-scale litigation. This Pledge is called the CPR Chemical Industry Dispute Resolution Commitment.
(c) Insurance Industry
(i) The following protocols and commitments have been signed by members of the insurance industry to aid in dispute resolution
CPR Insurance Industry Environmental Dispute Resolution Protocol
Insurer California Construction Defect Dispute Resolution Protocol
Future Major Disaster Pledge
Insurance Industry Dispute Resolution Commitment
International Reinsurance Industry Dispute Resolution Protocol
Inter-Insurer Dispute Resolution Commitment for Disputes Relating to the September 11, 2001, Disaster
(d) Food Industry
(i) CPR has drafted a means by which corporations and law firms in the food industry can commit to trying ADR procedures before moving to full-scale litigation. This Pledge is called the CPR Food Industry Dispute Resolution Commitment.
(e) Non-Prescription Drug Industry
(i) CPR and the Nonprescription Drug Manufacturers Association (now the Consumer Healthcare Products Association) have developed a dispute resolution commitment for companies in the nonprescription drug industry. The pledge is called the CPR NonPrescription Drug Industry Dispute Resolution Commitment.
(i) Businesses that attempt to contract electronically with other businesses often confront inconsistent laws of contract formation and enforcement. CPR has drafted a means by which businesses can commit to trying ADR procedures before moving to full-scale litigation. This Commitment is called the Global E-Commerce ADR Commitment. Signatories to this document seek to create enforceable business-to-business electronic contracts, and to resolve disputes concerning those contracts in an expeditious and businesslike way.
(i) The Franchise Mediation Program was established in 1993 by a group of franchisors who sought a way to resolve disputes with franchisees without the rancor, uncertainty and cost of litigation, wherever possible. This Committee and CPR have drafted a means by which corporations and law firms in the franchise industry can commit to trying ADR procedures before moving to full-scale litigation: Commitment to CPR Procedure for Resolution of Franchise Disputes.
ii) Determining Damages
Too often damages are not dealt with early enough in arbitral proceedings, with the presentation of damages evidence left until near the end of the case. In such situations, the damages evidence that is presented may be based on theories that have not been previously articulated by the parties presenting them. Moreover, the presentation of damages evidence has frequently been left to accounting, financial and econometric experts whose presentations often fail to communicate with clarity to the arbitrators. (CPR Protocol on Determination of Damages in Arbitration)
iii) Ethics and Best Practice
As client representatives, public citizens and professionals committed to justice and fair and efficient legal processes, lawyers should help clients and others with legal matters pursue the most effective resolution of legal problems. This obligation should include pursuing methods and outcomes that cause the least harm to all parties, that resolve matters amicably where possible, and that promote harmonious relations. Modern lawyers serve these values of justice, fairness, efficiency and harmony as partisan representatives and as third-party neutrals.
While there continues to be some controversy about whether serving as a mediator or arbitrator is the practice of law or may be covered by the ancillary practice Model Rule 5.7, it is clear that lawyers serving as third-party neutrals need ethical guidance from the Model Rules with respect to their dual roles as partisan representatives and as neutrals... Lawyers may be disciplined for any violation of the Model Rules or misconduct, regardless of whether they are formally found to be serving in lawyer-like roles.
(CPR Model Rule for The Lawyer as Third-Party Neutral)
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