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A Primer on Dispute Resolution Clauses in Business Agreements– Key Drafting Considerations | Cutler Nylander & Hayton
You are here: Home / Arbitration / A Primer on Dispute Resolution Clauses in Business Agreements– Key Drafting ConsiderationsA Primer on Dispute Resolution Clauses in Business Agreements– Key Drafting Considerations August 17, 2011 by philcutler © 2011, Philip E. Cutler
Cutler Nylander & Hayton, P.S.
1191 Second Avenue, Suite 1650
Telephone: (206) 340-4600
Facsimile: (206) 340-4646
Phil Cutler is a principal in the Seattle law firm Cutler Nylander & Hayton, P.S., where his practice emphasizes trial and appellate practice and dispute resolution, including mediation and arbitration, primarily in commercial and business matters, including antitrust and product distribution; corporate and complex commercial matters; intra-corporate disputes; employment; government relations; and licensing and protection of intellectual property. As principal outside general counsel for a major manufacturer of consumer electronics goods during the 1980s and into the 90s, Mr. Cutler was responsible for advising the client on issues relating to the national and international distribution of its products and for drafting and annually updating the client’s distributor and rep agreements as well as the sales force’s employment agreements.
He has been active for many years in the ADR activities of the Federal Bar Association of the Western District of Washington, serving as chair or co-chair of the FBA’s ADR Committee from 1985-1998; Mr. Cutler is a charter member of the WSBA and KCBA ADR Sections; he was 1998-99 chair of the WSBA ADR Section and 2002-2003 chair of the KCBA ADR Section; from 2003-2008 he served as Membership Chair of the ABA Dispute Resolution Section and a member of the Section’s Council from 2005-2008. Mr. Cutler is a Fellow of the College of Commercial Arbitrators (www.thecca.net) and a member of the American Arbitration Association’s Commercial Arbitration, Mediation and Large Complex Case panels and serves frequently as arbitrator or mediator in complex commercial cases. He has been presenter at, or authored or contributed to, a variety of seminars and publications in the field of alternative dispute resolution and authored the chapter on Alternative Dispute Resolution for Doing Business in Washington State (WSBA Int’l Practice Sec., 1996, 2003 and 2010 eds.). Mr. Cutler obtained his undergraduate degree from Georgetown University (1970) and graduated with honors from Northwestern University School of Law in 1973.
These materials were prepared for an April 2011 presentation at the annual meeting of NALS (the Association of Legal Professionals) of Washington.
A PRIMER ON DISPUTE RESOLUTION CLAUSES
IN BUSINESS AGREEMENTS –
© 2011, Philip E. Cutler
I. OVERVIEW OF THE MOST POPULAR DISPUTE RESOLUTION METHODS
A. Resolving disputes efficiently and effectively is a key consideration of business people everywhere. Counsel’s role is to assist the client in determining the most appropriate dispute resolution method for the types of disputes likely to arise.
B. Dispute resolution methods are either adjudicative….the parties vest a third party with the responsibility and power to resolve their disputes….or non-adjudicative….the parties negotiate a resolution themselves, either directly or with the assistance of an intermediary or facilitator. Regardless of which type of dispute resolution is utilized, it is critical that all parties have confidence in the method of dispute resolution, in the institutional forum under whose auspices the method of dispute resolution is to be supervised, and in the person or persons directly involved in the dispute resolution process.
C. Methods of dispute resolution can be depicted as a series of alternatives on a continuum ranging from negotiation to litigation. As one moves across the continuum, the dispute resolution method becomes more adversarial and adjudicative, i.e., the parties surrender to a third party more power, and in arbitration and litigation, all power, to resolve the dispute. 1
Negotiation……………………… is a process whereby disputants communicate directly with each other about the issues in disagreement in order to reach a settlement of their differences.
Mediation……………………….. is a process whereby an impartial third party (the mediator) facilitates communication between negotiating parties which may enable the parties to reach a settlement.
ENE………………………………. early neutral evaluation is a process whereby a person experienced in evaluating disputes of the type presented is chosen by the parties to evaluate the case, narrow the issues, assist in case planning and management and, if appropriate, assisting in settlement discussions.
Med-Arb………………………… mediation-arbitration is a process whereby an impartial third party facilitates communication between negotiating parties and, failing settlement, receives evidence and issues a binding decision.
Arbitration……………………… is a process whereby one or more impartial third parties hear and consider the evidence and testimony of the disputants and issue a decision (the “award”) which is usually binding and not appealable on the merits.
Litigation/Trial………………… is a process whereby an impartial judge or jury receives evidence presented by the disputants and issues a binding, enforceable court order.
D. It is critical that counsel and the client thoroughly understand the nature of the business relationship to be created, the types of disputes which may arise and the considerations important to each party in resolving them, the cultural differences which may be important to both the client and the foreign trading partner, and the dispute resolution options available both domestically and in the foreign country. The relative advantages and disadvantages of each method of dispute resolution must be carefully evaluated and the method, or series of methods, that most appropriately addresses the needs of not only the client but the foreign trading partner should be selected.
II. WHAT ARE DISPUTE RESOLUTION CLAUSES…AND WHY THEY ARE IMPORTANT
A. The effective dispute resolution clause (or section) describes in general terms the types of disputes that it governs, provides for one or more methods to resolve disputes, identifies the forum for resolution of disputes and the law to be applied in resolving disputes, and subjects all parties to the personal jurisdiction of the identified dispute resolver.
B. It is a reality of business life that disputes will arise. If the agreement is silent on dispute resolution, the parties’ only enforceable option is litigation…which can be expensive, the forum may be subject to selection by only one party, and jurisdiction may be dependent on a complicated legal and factual analysis.
III. WHERE YOU COMMONLY FIND DISPUTE RESOLUTION CLAUSES
Credit Card applications/statements
Stock brokerage firm applications/agreements
Domestic business contracts
Law office fee agreements and engagement letters
Terms and agreements on websites for services – the box that you must check that you have read to get to the purchase point
IV. DRAFTING THE DISPUTE RESOLUTION SECTION
A. Dispute resolution deserves a section – rather than merely a clause – in the agreement. Counsel should resist the temptation to simply copy the dispute resolution clause from a prior contract. Instead, think about:
The types of disputes which might arise between the parties,
Who and what are likely to be involved in any dispute,
Where these people and things are likely to be located, and
How such disputes might best be resolved…from your client’s perspective …from the other party’s perspective…from the standpoint of what’s best for the “deal”.
B. To ensure a workable dispute resolution process, enlist the help of an experienced litigator or ADR practitioner.
C. While a negotiated resolution of any dispute is almost always preferable to submission of the dispute to a third party for resolution, the dispute resolution section should always provide for an adjudicative dispute resolution process. Both your client and your client’s business partner want and need finality, to be able to definitively close the book on any dispute. In drafting the dispute resolution section, and in providing for particular dispute resolution procedures, it is critical that key issues be adequately addressed. A good dispute resolution section will, either textually or by reference to a known and identified set of rules and procedures:
What disputes are covered? What disputes, if any, are outside the scope of the selected procedure? Who decides disputes over the existence of a contract (in the U.S., generally the court2) and over “gateway” issues such as whether there is a valid arbitration agreement or the scope of the dispute resolution clause (again, in the U.S., generally the court3 unless the arbitrator is expressly assigned that task4)?
Who are likely to be necessary parties to the dispute resolution process? Are they subject to an appropriate court’s jurisdiction? Can they be compelled to participate in an arbitration?
What law governs interpretation of the contract?5 Enforcement of any adjudicative decision or negotiated settlement? What law or rules govern the dispute resolution process?6 In adjudicative dispute resolution, do those rules provide that the process is self-effectuating and self-enforcing (i.e., the selected process can continue despite an objection from a party or a party’s failure to appear or refusal to participate, unless the proceedings are stayed by court order or agreement)?
What are the costs involved? Who pays?7
Who is in the pool of neutrals? What qualifications should they possess? Who selects the neutral involved in the proceeding? Who resolves any disputes over selection? How “neutral” is the neutral?8 How is the neutral insulated from partiality?
Where is the dispute to be resolved?9 Who resolves any disputes on this subject?10
How does the process work? Should there be a time limit on completion of the dispute resolution process? In adjudicative dispute resolution, what discovery is available? What language will be used for the proceeding?
In adjudicative dispute resolution, how is the arbitral award or judgment enforced? Where?
There are many resources to assist counsel in drafting an appropriate dispute resolution section. A good place to start is the American Arbitration Association’s “Drafting Dispute Resolution Clauses – A Practical Guide”. It is available in hard copy from any AAA office or can be downloaded from the AAA’s website: www.adr.org.
V. CHOOSE AN APPROPRIATE METHOD OF DISPUTE RESOLUTION
A. It is a reality of business life (indeed, any human endeavor), that disagreements are likely to arise during the course of any business relationship. Thus, counsel will always provide contractually for an adjudicative method of dispute resolution. Wise counsel will also consider and – if appropriate – provide for – one or more non-adjudicative methods of dispute resolution, either as a separate stage in the dispute resolution process or as an adjunct to the chosen adjudicative dispute resolution process.
B. In assessing what dispute resolution mechanism(s) to specify in the contract, it is critical that counsel
the nature of the business relationship to be created;
the types of disputes which may arise and the considerations important to each party in resolving them; and
the dispute resolution options available and the relative advantages and disadvantages of each;
carefully evaluate dispute resolution options against the foregoing factors; and
select the method, or series of methods, that most appropriately addresses the needs of the client.
C. As the dispute resolution section is frequently the last item to be negotiated in a contract, the temptation is to turn back to and adopt verbatim the dispute resolution section from a prior business contract. Counsel should resist that temptation: it is never wise to do so.
VI. ADJUDICATIVE DISPUTE RESOLUTION – OPTIONS ARE LITIGATION AND ARBITRATION
All lawyers are familiar with traditional litigation, at least as practiced in their jurisdiction. While it has pluses and minuses, it is predictable even in its unpredictability: lawyer and client know that a judge, generally randomly selected by the court, will preside over and decide the dispute (or preside over a jury which will decide the dispute) using well-established evidentiary rules at a trial generally conducted many months, or even years, after the dispute has erupted. Although the cost of invoking the court’s jurisdiction is nominal, as court filing fees are rarely more than a few hundred dollars, savvy trial counsel can wear down her opponent’s resolve (and deplete its bank account) by aggressive motions practice and burdensome discovery in U.S. courts. Finally, the court’s judgment or the jury’s verdict is rarely the last word as appeals to ever-higher courts can consume years – and thousands more dollars. Nonetheless, litigation is a tried and true method of dispute resolution and, indeed, may be the method of choice in particular circumstances. If it is the choice, it should be made knowledgeably and with due regard to the consequences of having chosen it.
B. Arbitration11
1. Like litigation, the purpose of arbitration is to decide a dispute. While it shares some characteristics with litigation, there are also important differences.
While arbitration is voluntary in the sense that parties must have agreed at some point to submit a dispute to arbitration, once arbitration has been selected as the dispute resolution mechanism, no party may ordinarily unilaterally withdraw from the process without consequence.
Although the arbitrator is not a judge, he or she functions in much the same manner as does a judge and determines whether or not a claim should be allowed and, if so, in what amount or under what circumstances. The arbitrator receives evidence, albeit not necessarily constrained by strict evidentiary rules, and decides the facts and the law, ultimately making an “award.” As in litigation, there is a “winner” and a “loser”, oftentimes with attendant publicity about, and financial or other consequences to, who won and who lost. Unlike litigation, the arbitrator’s award is most often final and binding – traditional appellate review is unavailable in the United States and the grounds for vacating an arbitral award are extremely limited.12 Appellate options for foreign arbitral awards may be similarly limited.
The arbitration process is generally more confidential than a court proceeding. However, while almost all arbitration hearings are “closed” (members of the public are not admitted, nor is any public record kept of the proceeding), the arbitration award, once filed, becomes a matter of public record.
An arbitration award may generally be filed in court and, once confirmed by the court, becomes a judgment with the same force and effect as a judgment which results from a trial.
2. While arbitration is frequently used as a stand-alone method of resolving disputes – whether internationally or in domestic situations – it may be used either as the last stage in dispute resolution (with mediation or some similar ADR method preceding it) or as an aid to settlement negotiations (when the arbitral result is non-binding or binding only if a trial de novo is not timely demanded).
3. Parties choosing arbitration over traditional litigation generally place a high priority on the following characteristics of arbitration:
More-neutral forum…..not generally of concern in domestic disputes, but of tremendous concern in international disputes where national courts may well favor, consciously or unconsciously, the “native” party – to the concurrent disadvantage of the U.S. party;
Opportunity to select the decision-maker(s)…..under the rules or procedures of most institutional ADR providers the parties are provided with a list (with biographies) of potential arbitrators, from which the parties are free to stipulate to an arbitrator or arbitration panel…..or the parties can strike some names and the institution makes a selection from among those names which have not been stricken;
Confidentiality…..the parties and the arbitrator(s) control access to the arbitration proceeding; the general public is not ordinarily admitted; arbitration papers are not “public” documents;
Reduced legal expenses…..parties need not have a lawyer; “discovery” is generally much more limited than in litigation; “motions practice” is discouraged;
An early opportunity to present evidence…..case backlogs in state and federal courts may mean a trial date is a year or more after filing the papers initiating the case; if there is significant delay in arbitration, it is most often caused by (or at the request of) the parties as the arbitrator(s) are generally willing to schedule a hearing within a few months at most;
An expeditious decision…..the rules of most institutional ADR providers require an award within 30 days after the hearing-as-a-whole is closed; and
Finality…..the grounds for vacating an arbitral award are extremely limited in the U.S. (9 U.S.C. §10; RCW 7.04A.230; Section 23 of the Revised Uniform Arbitration Act in states which have adopted it); traditional appellate review is unavailable under either state or federal law.13 While the disappointed party may appeal a U.S. trial court’s confirmation of an award, appeal prospects are generally dim; with respect to international arbitrations, recognition and enforcement of arbitral awards is (with respect to signatory nations) governed by the New York or Panama Conventions (see note 12, above).
4. While arbitration is frequently used as a stand-alone method of resolving disputes – whether internationally or in domestic situations – it may be used either as the last stage in dispute resolution (with mediation or some similar ADR method preceding it) or as an aid to settlement negotiations (when the arbitral result is non-binding or binding only if a trial de novo is not timely demanded). Especially in the context of international business transactions and relationships, arbitration is the adjudicative dispute resolution mechanism of choice.
5. Arbitration is often a preferable method of dispute resolution.14 Too, if appropriate resolution of business disputes is likely to require a decision-maker with specialized experience, or where privacy and confidentiality of the proceedings is desired, arbitration may be the option of choice.
Note: Any form of adjudicative dispute resolution is an expensive process and, because the parties have vested a third party or parties with authority to decide the dispute, an uncertain process as well. It is costly to clients not only directly, in terms of the money expended on lawyers’ fees and litigation or arbitration costs, but also indirectly: clients must devote significant time and energy to prosecution (or defense) of the case. In the business context, this diversion of effort from “the business” of the business is expensive. In all contexts, litigation or arbitration is often emotionally draining as the parties must relive the dispute, even tedious details of it – and, due to the breadth of discovery available (and almost always pursued) in traditional U.S. litigation, with unrelenting frequency as well. Too, what a judge (or arbitrator or panel of arbitrators) or jury may do with a dispute is often uncertain: the client may win, but it also may lose – or not “win” as much as it hoped for. Moreover, court proceedings, and their outcomes, are public; even arbitration awards become public when proceedings are begun to enforce the award. Finally, litigation or arbitration is often an unsatisfactory way to resolve a dispute and achieve closure to it.
Consider, therefore, requiring some form of non-adjudicative ADR process (e.g., negotiation, mediation), either as a separate stage in the dispute resolution process or as an adjunct to the chosen adjudicative process. While these consensual methods of dispute resolution are always available to the parties, even after a dispute has ripened to the point of a party seeking an adjudicative solution, expressly providing for such processes in the dispute resolution section may show the foreign trading partner the U.S. company’s good faith and commitment to attempting to resolve any disputes by way of negotiation.
C. Why Not Automatically Opt For Arbitration?
Obviously, to the extent the foregoing factors are high on the client’s priority list; counsel should seriously consider arbitration as the alternative to litigation. The benefits of arbitration do not come without cost, however. Among issues counsel and the client should consider are:
Higher filing fees…..all institutional ADR providers require payment of a filing fee in excess of state or federal court filing fees15 (e.g., AAA filing and case service fees range from $975 (for cases in which the claim is for $10,000 or less) to $11,450 (for cases in which the claim is for $1 million – $5 million), to $14,200 (for claims between $5 million and $10 million)). Fees for arbitrations administered by foreign arbitral institutions such as the International Chamber of Commerce Court of Arbitration can be considerably higher. Filing fees are generally a non-issue for consensual arbitration under a federal court-annexed arbitration program such as that in the Eastern (ED WA LR 16.2(g)) and Western Districts of Washington (WD WA LR 39.1(d)).
The parties compensate the decision-maker, the “system” does not…..arbitrators are paid for their services, generally at their normal billing rates (most U.S. arbitrators charge, like lawyers, by the hour; many non-U.S. arbitrators charge by the day); for complex cases involving several days (or weeks) of hearings-on-the-merits or numerous discovery spats, this cost can be substantial, particularly if the case is heard by a three-member arbitration panel.16 Be aware that some ADR provider organizations (such as, in the international context, the International Chamber of Commerce Court of Arbitration) set the compensation of arbitrators based on a sliding scale determined by the amount in controversy. Too, foreign-based arbitrators’ fees are commonly higher than U.S.-based neutrals, particularly those in the Pacific Northwest.
Discovery may be more limited than in litigation…..one of the key differences between arbitration and traditional litigation is the breadth of “discovery” available in arbitrations, a difference which can be a boon or a curse. In traditional litigation, once the case is commenced the parties begin, as they have every right to do under federal or state rules of civil procedure, what is known as the “discovery” process – each side sends the other many sets of detailed questions to which they want answers (interrogatories) and requests for many, many categories of documents (requests for production), then subjects both party-witnesses and non-parties to lengthy question-and-answer sessions (depositions). By contrast, in arbitration the parties get whatever “discovery” they’ve contracted for in their arbitration clause (either specifically or by incorporation of an ADR-provider organization’s rules) and whatever the arbitrator decides is appropriate under the circumstances. It is essential that counsel think through the types of discovery the client is likely to require and to expressly provide for it in the dispute resolution section. Obviously, the more the provided-for discovery resembles the full-blown discovery available in traditional U.S. litigation, the less benefit the client will realize in cost-savings and the greater the potential for delay in finally resolving the dispute through hearing. Foreign trading partners are generally wary of – and resistant to – the sort of wide-ranging discovery commonly permitted in U.S. courts. The rules of foreign arbitral institutions generally provide significantly less discovery – if any is permitted at all – than U.S. institutions such as the AAA and its international counterpart the International Centre for Dispute Resolution.
Opportunities to reverse an adverse arbitration decision are exceedingly limited…..generally, only arbitrator misconduct is ground for a U.S. court to vacate or refuse to confirm an award – errors of law or fact are not, as a general rule, grounds for vacating an arbitral award.17 If the client’s business is such that an adverse result in an arbitration proceeding could have serious consequences with respect to the client’s disputes with others similarly situated, counsel will want to balance the benefits of arbitration against the possibility that principles of collateral estoppel will be used offensively in other situations. Special rules (namely the New York or Panama Conventions) apply with respect to recognition and enforcement of international arbitration awards. See note 5, above.
Washington’s statutes of limitation do not apply in arbitration….. Broom v. Morgan Stanley, 169 Wn.2d 231, 240-245, – P.3d – (2010). Faced with this decision, the Washington Legislature may correct the anomaly that SOLs apply only in court proceedings.
D. The dispute resolution section should cover the whats, the whos, the wheres, the hows (see pp. 5-6, above). Drafting suggestions:
All disputes arising under or related to this Agreement, [including without limitation the formation thereof,18] or the performance of any party, shall be resolved by . . .
Litigation is sole option for any disputes
. . . the [insert court19] and all parties irrevocably consent to the jurisdiction of [that court] [those courts]. [Add: Choice of law provision]
Litigation is option for certain disputes, arbitration for other disputes – substitute the following for the general preamble
All disputes related to [describe – e.g., the enforcement or validity of copyright, trademark or patent rights] shall be resolved by the United States District Court for the Western District of Washington, and all parties irrevocably consent to the jurisdiction of that court. All other disputes arising under or related to this Agreement,[including without limitation the formation thereof,] or the performance of any party, shall be resolved by arbitration [insert arbitration clause . . . below]. [Add: general choice of law provision]
Arbitration – begin with general preamble, and then follow with
. . . arbitration under the Commercial Rules of the American Arbitration Association (“AAA”) in effect at the time this Agreement is executed or, with the consent of all parties, the Rules in effect at the time arbitration is commenced. The location of the arbitration shall be such city in the State of Washington determined by the AAA or, if the AAA declines or fails to determine the city, by the arbitrator(s).20 Any award entered by the arbitrator(s) may be confirmed, modified or vacated, and judgment entered, by the Whatcom County Superior Court or, if the United States District Court for the Western District of Washington has diversity jurisdiction, by that court, and all parties irrevocably consent to the jurisdiction of those courts. The provisions of the Federal Arbitration Act (9 U.S.C. § 1 et seq.) and the Washington Uniform Arbitration Act (RCW Chapter 7.04A), to the extent applicable, shall govern the arbitration. [Add: general choice of law provision]
VII. NON-ADJUDICATIVE DISPUTE RESOLUTION — MEDIATION
A. Mediation is not, of course, the only non-adjudicative method of dispute resolution. It is, however, the most popular such method and is therefore treated in more detail here.
B. In mediation21 , the services of an independent neutral…the mediator…are employed to assist the parties in negotiating settlement of a dispute.
The mediator attempts to facilitate an out-of-court settlement between the parties by identifying key considerations and interests of the parties, by building upon areas of common agreement and by challenging the parties and their lawyers to think critically about the case, potential outcomes, and the business and other risks which attend continued pursuit of the dispute (or the lawsuit, if one has been filed).
In most states in the United States the mediation process is confidential, either by statute or court rule22; no information disclosed to the mediator during the mediation process may be revealed outside the mediation setting (or even to the opposing side without consent).
The mediator is not a judge and does not function like a judge. Nor is the mediator the lawyer for any party. While the mediator may, in the course of the mediation, give the parties and their lawyers his or her opinion or best judgment, based on experience, as to a matter in dispute, the mediator does not decide who is right and who is wrong, nor does the mediator “decide” any of the issues in the dispute. There is no “loser” in a mediation.
C. While mediation can be used as a stand-alone ADR method, it is commonly used either as the first stage in dispute resolution (with either litigation or arbitration following) or as an adjunct to either a pending lawsuit or arbitration proceeding. Mediation (or conciliation, as it is frequently known internationally) is an especially attractive method of dispute resolution in countries in which businesses are not especially litigious or in which the adversarial system of dispute resolution is disfavored.
D. In some countries mediation is required as an initial step in the dispute resolution process. Additionally, some countries display an historical antipathy toward non-consensual adjudicative dispute resolution. Consider adding mediation or some other form of informal, direct party-to-party dispute resolution as a prerequisite to adjudicative dispute resolution. Pre-arbitration conciliation can be either informal (the dispute is referred first to senior management, then to the parties’ respective chief executive officers) or formal (using a mediator). Some possible clauses:
Drafting suggestions:
Before [proceeding to invoke adjudicative dispute resolution of any dispute covered by] [demanding arbitration of any dispute under] this section, the parties shall first….
In the event of any dispute, claim, question, or disagreement arising from or relating to this Agreement or any party’s performance or alleged breach thereof, the parties shall [each designate a senior executive, who shall] use their best efforts to settle the dispute, claim, question or disagreement. To this effect, they shall consult and negotiate with each other in good faith and, recognizing their mutual interests, attempt to reach a just and equitable solution satisfactory to both parties. If they do not reach such a solution within a period of 60 days, then, upon notice by either party to the other, all disputes, claims, questions, or differences shall be finally settled by arbitration…..
If a dispute arises out of or relates to this contract, or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by [mediation] [conciliation] administered by … before resorting to [arbitration under this section][, litigation, or some other dispute resolution procedure].
E. When including a pre-arbitration negotiation or mediation clause, consider whether the parties should be required to continue to perform the contract pending negotiation or mediation. Also, consider tolling applicable statutes of limitation during the negotiation or mediation phase – or expressly providing that such statutes are not tolled. If negotiation or mediation prior to entering into an adjudicative dispute resolution proceeding is contractually required, be careful to follow the dictates of the clause before seeking adjudicative dispute resolution so as not to impair your client’s ability to proceed with arbitration or litigation.
F. Mediation clauses can address qualifications of the mediator, how the mediator is selected, how mediation fees and expenses are allocated, locale of the mediation or negotiation, time limits to complete the mediation or negotiation, and similar ministerial – but nonetheless important – concerns.
G. Mediation can ordinarily be begun on a “submission” basis, even in the absence of a clause requiring it. In “submitted” mediations, all parties agree to submit a particular dispute to mediation under the rules of a particular provider (e.g., AAA Mediation Rules) or on terms described in the submission agreement.
H. Finally, whether or not to submit a dispute to mediation requires an analysis of the parties’ interests, not just their rights. The same is true when, having submitted a dispute to mediation, the parties engage in mediation proceedings.
1 The following description of the various procedures along the dispute resolution continuum is adapted from Manual on Alternative Dispute Resolution, prepared by the ADR
Committee of the Colorado State Bar Association.
2 See, e.g., Granite Rock Co. v. Int’l Brotherhood of Teamsters, – U.S. –, 130 S. Ct. 2847 (2010). While the rules of the administering arbitration provider (see Rule R-7(b), AAA Commercial Rules) may give the authority to determine the validity or existence of a contract to the arbitrator, it may be best to explicitly assign that authority to the arbitrator in the arbitration agreement if that is what the client desires. See note 15 below.
3 See Nagrampa v. MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006).
4 See Rent-a-Center West, Inc. v. Jackson, – U.S. –, 130 S. Ct. 2772 (2010). That the rules of the administering arbitration provider (see Rule R-7(a), AAA Commercial Rules) give the authority to the arbitrator is not sufficient; the parties’ arbitration agreement must specifically grant to the arbitrator the authority to decide arbitrability issues.
5 Pay special attention to the contract’s provisions regarding choice of law. Note that in the U.S. the forum-state’s conflict-of-law rules generally govern whether to give effect to the contract’s choice of law. See Bridge Fund Capital Corp. v. Fastbucks Frachise Corp., – F.3d – (9th Cir. 2010), for a discussion of how this played out in a dispute between a California franchisee and a Texas-headquartered franchisor where the contract specified Texas law as governing.
6 Regardless of whether the arbitration is “administered”, there should be a clear understanding of what rules govern the proceeding. The major U.S. provider-organizations have well-established rules. See, e.g., www.adr.org (AAA), www.jamsadr.com (JAMS). The CPR Institute doesn’t normally administer arbitrations, but it does have a set of rules for use in non-administered arbitrations. www.cpradr.org. There are a number of international organizations that administer arbitrations; many have their own rules.
7 Excessive costs to commence an arbitration or proceed in arbitration can be the basis for a U.S. court to refuse to compel arbitration as unconscionable. See, e.g., Mendez v. Palm Harbor Homes, 111 Wn.App. 446, 45 P.3d 594 (2002).
8 Neither an arbitration-provider organization nor its neutrals should be tied to one of the parties, as that tie may render the arbitration clause unconscionable and unenforceable. See, e.g., Graham v. Scissor-Tail, Inc., 28 Cal. 3d 807, 623 P.2d 165, 171 Cal. Rptr. 604 (1990).
9 Bridge Fund Capital Corp., supra note 5, held that the arbitration agreement’s requirement that the arbitration take place in Texas was unconscionable and therefore unenforceable – defeating the franchisor’s choice of arbitration as the dispute resolution mechanism. Many foreign countries will not recognize a location-selection clause specifying a hearing location outside its borders, particularly where its resident objects.
10 The rules of most arbitration-provider organizations provide that either it or the arbitrator(s) decide location in the event of a dispute between the parties on that subject.
11 The description of arbitration which follows is also generic and not intended to reflect how arbitration is considered or handled in foreign countries or in all states.
12 See, e.g., RCW 7.04A.230; 9 U.S.C. § 10. With respect to enforcement of foreign arbitral awards under the U.N. Convention on the Recognition and Enforcement of Foreign Judgments (the “New York Convention”) or the Inter-American Convention on International Arbitration (the “Panama Convention”), see Article V of the New York Convention, Article 5 of the Panama Convention (grounds for declining to recognize or enforce such awards differ and should be carefully analyzed. The conventions are reproduced after 9 U.S.C.A. § 201 (New York Convention) and 9 U.S.C.A. § 301 (Panama Convention). U.S. courts asked to recognize and enforce such awards will apply the conventions’ stated standards. 9 U.S.C. § 207; 9 U.S.C. § 302.
13 See note 12, above.
14 Even where arbitration is not specified, parties may generally agree to submit any pending dispute to arbitration. In such cases, counsel will want to incorporate in the “submission agreement” many of the clauses discussed below and confirm that the law of the trading partner’s state or country will recognize the choices made.
15 Parties can, of course, contractually provide for private (i.e., “non-administered”) arbitration, or agree to do so post-dispute, but by doing so will run up arbitration costs, since the arbitrator will handle (and the parties will pay for) case administration, and the parties may not achieve the benefits of having a trained case administrator/manager handle administration of the case in a manner likely to ensure that procedural niceties are followed…..thus insulating the award from direct or collateral attack. Private (i.e., “non-administered”) arbitration should not be used in international arbitrations; always use an ADR service provider. The presence of a neutral administering organization (and rules) will give your client’s business partner – and your client – added comfort.
16 This is potentially a non-issue for consensual arbitration under a federal court-annexed arbitration program such as that in the Western District of Washington (WD WA LR 39.1(d)), as all cases are heard by a single arbitrator and some federal arbitrators may be willing to serve at the statutory rate (currently $250/day) as a pro bono service.
17 Federal courts almost uniformly reject an arbitrator’s error of law as a ground for vacating the award. The rule in state court varies by state. Washington follows the “error of law/face of the award” doctrine: if an error of law appears on the face of the award or on some paper delivered with it, the award is subject to vacatur. See Broom v. Morgan Stanley, 169 Wn. 2d 231, 236-240, – P.3d – (2010), for the most recent expression of the doctrine, which is now frequently grounded on the “exceeding powers” provision (an express ground for vacatur under the Washington Uniform Arbitration Act). Justice Utter’s concurring opinion in Boyd v. Davis, 127 Wn.2d 256 at 266-270, 897 P.2d 1239 (1995), gives a good history of the development of the rule under what became RCW chapter 7.04 (now repealed and replaced with RCW Chapter 7.04A). The vitality of “manifest disregard of the law” as a ground for vacatur in cases subject to the U.S. Arbitration Act is in question following the Supreme Court’s decision in Hall Street Assocs. LLC v. Mattel, Inc., – U.S. –, 128 S. Ct. 1396 (2008).
18 Note that some courts will not require the parties to arbitrate fraud-in-the-inducement claims unless the arbitration agreement specifically covers such claims.
19 Note that in order for a federal court to have jurisdiction, either a federal law claim must be stated or there must be diversity (and the amount-in-controversy threshold met).
20 If additional requirements are desired (e.g., number of arbitrators higher or lower than the ADR-provider’s general rules, application of provider’s supplemental rules (e.g., AAA’s Large Complex Case or Expedited rules (for small dollar value cases)), only arbitrators with industry- specific or length-of-practice experience or substantive-law experience, limits on (or expanded) discovery, expedited hearing, etc.), here is the place to insert them. Be careful, however, of making the arbitration too complex or cumbersome . . . or unwittingly making the arbitration more expensive.
21 The description of mediation which follows is generic and not intended to reflect how mediation is considered or handled in foreign countries or in all states. Moreover, the term mediation is used throughout these materials to describe a facilitated resolution of a dispute. Counsel should be aware that in the international context, mediation is often referred to as conciliation. The processes are similar, but may not be identical in all respects. Careful counsel will ensure that all parties to the international business agreement have the same understanding of whatever term is used.
22 In Washington, see RCW 5.60.070 (Uniform Mediation Act). Many other states have adopted the uniform act. In Washington, see also Local Rule CR 39.1(c)(5), Local Rules for the U.S. District Court, Western District of Washington; Local Rule 16.2(d)(3), Local Rules for the U.S. District Court, Eastern District of Washington. The Alternative Dispute Resolution Act of 1998, enacted by Congress in October 1998 provides for confidentiality of mediation proceedings in all federal courts. See 28 U.S.C. § 652(d).
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