Arbitration clauses are often included in the back pages of commercial contracts with the expectation that, should a dispute arise in the future, the contracting parties will be protected from an expensive, distracting lawsuit that plays out in a public forum over many years. But a boilerplate clause can cause more headaches – and cost more money. Attention to a few important issues when drafting such clauses can minimize the time, cost and pain of commercial arbitration. This article focuses on five such issues.
1. REFINE THE ARBITRATOR SELECTION PROCESS
The process of selecting an arbitrator can be a hidden and unwelcome source of delay that bottlenecks progress after arbitration has been demanded. To avoid spending months attempting to agree on an arbitrator, measure the time allotted for selection in days or weeks. Include a default method of selection if agreement cannot be reached, such as the use of a roster provided by an arbitration facilitation organization from which the name of the arbitrator must be randomly drawn by an established deadline absent prior agreement.
Equally important, create arbitrator selection criteria. If you are choosing arbitration over a traditional lawsuit because you have concerns about whether the pool of judges have the right expertise to resolve the expected disputes, make sure to identify critical expertise or other qualifications in the arbitration clause. Criteria could include 10 years experience with a certain industry, IT project management experience, Florida Bar membership for at least 10 years, a residence in the arbitration forum, or higher education that includes an MBA. Identifying critical expertise which the arbitrator must have can eliminate the potentially substantial cost of non-party experts if you select an arbitrator who does not need expert assistance to "understand the evidence or to determine a fact in issue." However, avoid drafting the provision such that the requirements for the arbitrator are so narrow that you complicate, rather than expedite, the selection process.
Absent good reason, avoid panel arbitration. Not only does a panel triple your direct payments to arbitrators, but there will be additional costs and delays associated with selecting the neutral, coordinating two more schedules, and asking three strangers to reach consensus. You should also expect arbitrators to command higher, non- negotiable hourly rates than your humble outside counsel because of the arbitrators' experience. If you cannot identify a benefit that exceeds those costs, avoid agreeing to panel arbitration.
2. LIMIT THE SCOPE OF DISCOVERY AND MOTION PRACTICE
As a general rule, keep discovery narrow, and include a "safety valve" for additional discovery as agreed by the parties or as permitted by the arbitrator upon a showing of good cause. Most private arbitration organizations have adopted flexible rules that rely on the parties' cooperation and the arbitrator's discretion to establish discovery and motion practice limits. Because arbitration is often chosen to avoid the burdens of traditional discovery, think twice before agreeing that the Florida or Federal Rules of Civil Procedure will apply. Is the current federal default of 10 depositions of 7 hours each acceptable? Or is it more consistent with your goals to limit each party to, say, no more than 4 fact witness depositions or no more than a total of 20 hours? Is there a reason for allowing unlimited non-party experts? Will it hurt your ability to present your case if all briefs are limited to 5-10 pages, and the only permitted types of briefs are initial statements of the case, discovery motions and a pre- hearing brief? Should the cost of e-discovery be shifted to the party requesting it? Can you limit, in advance, the custodians, time period, or volume of e-discovery?
3. ESTABLISH A MECHANISM FOR SCHEDULING A SHORT, EARLY HEARING
After a dispute arises, one party often has an incentive to postpone resolution for as long as possible. Since the cost of outside counsel is often linked to the length of the dispute resolution process, that incentive costs both parties money. To minimize that problem, the parties should require that the final hearing be held within a certain number of months from a fixed event such as the filing of the arbitration demand or the appointment of the arbitrator. Again, a safety valve should be included that allows the arbitrator to permit a modest extension in the event of unavoidable delays.
If the duration of the final hearing is not agreed upon, retained counsel will likely want a final hearing of at least five days, without considering that a week away from the office is unappealing to your "star" witness. Why not limit the final hearing to a fixed number of consecutive days, with a safety valve for additional days as agreed by the parties or as permitted by the arbitrator upon a showing of good cause? Shorter hearings can work. For example, the arbitration clause could include a provision to use attorney proffers acceptable to the arbitrator. (An attorney proffer, common in bankruptcy court, is the direct testimony of a witness that is stated by counsel or through a written declaration provided in advance instead of direct examination. The witness would be made available for cross-examination by the opposing party and the arbitrator.) Not only will the final hearing proceed more quickly, but the costly preparation of direct examination scripts is eliminated.
4. IDENTIFY THE EXACT LOCATION OF THE HEARING
Merely identifying the city, county or district where the final hearing will be held is not enough. Remember, you need a facility in which to hold your final hearing, and facility rental can become a significant expense. If you are not specific, and the agreed arbitrator suggests holding the hearing in the five-star hotel in which he or she is staying, it can be uncomfortable for your counsel to oppose that suggestion. Consider a clause that favors using free available options: the offices of outside counsel or the arbitrator. And make sure the location stands the test of time. If you identify the city of your headquarters when the agreement is signed as the forum, what happens when headquarters is relocated years later?
5. AGREE ON CONFIDENTIALITY TERMS … ONCE
Arbitration is private litigation, but that does not necessarily mean that the dispute will remain confidential. Consider including a confidentiality provision that will govern any discovery exchanged in the arbitration and public comments about the arbitration. It will be more cost-effective to negotiate all confidentiality issues once upfront, when everyone is cooperating, than to negotiate a discovery-focused protective order for each arbitration, and a confidentiality provision as part of the inevitable settlement process.
The issues that are significant for drafting a smarter arbitration clause vary from client to client and, to some extent, from dispute to dispute. Identifying all of them is beyond the scope of this article. None of these suggestions is a deal breaker that should frustrate an otherwise sound business contract. But consideration of these issues should help achieve the particular advantages of arbitration that are sought. If the goal is a non-public resolution, focus on confidentiality. If the goal is a quick resolution, focus on scheduling and limiting discovery. If the goal is a trier of fact with particular expertise, focus on arbitrator selection.