Employment and Labor

Understanding Arbitration Clauses in Contracts

Understanding Arbitration Clauses in Contracts

Contractual agreements often include clauses that require arbitration should a dispute arise. Many times, attorneys and their clients encounter   instances where arbitration clauses did not fully consider the scope of potential disputes, often resulting in unforeseen outcomes.

What is one of the biggest problems you have seen lately with arbitration clauses?

The biggest issue I’ve seen lately is arbitration clauses that do not clearly set out what claims the parties wish to submit to arbitration. If the clause is too expansive, a party may be forced to arbitrate claims that it never intended to submit to arbitration. On the other hand, if an arbitration clause is too restrictive, a party may not be able to compel arbitration of some claims.

The problem is that parties do not always appreciate the consequences of the language used in the arbitration provision. For example, clauses that require arbitration of disputes “arising under” a contract are seen as more restrictive by the courts than clauses that require arbitration of disputes “arising under or related to” a contract. A tort claim, as opposed to a breach of contract claim, may not be arbitrable under an “arising under” contract, but could be sent to arbitration under an “arising under or related to” contract.

What are the top three things an attorney should consider when drafting or reviewing an arbitration clause for a client?

The most important thing an attorney can do is to clearly understand the client’s business, including the risks they face. The lawyer should then have a real, substantive discussion with the client to determine what claims would be appropriate for arbitration, and what claims would not. Finally, thought should be given to the arbitration process itself – i.e., whether written pleadings should be required, the scope of any discovery, whether to use an arbitration service like AAA, how to pick the arbitrators, etc. Once all these things are fully understood, a very specific and detailed arbitration clause can be drafted that meets the client’s needs and sets forth the client’s expectations.

What should attorneys do if they are retained to represent a client involved in a dispute where there is an arbitration provision?

After talking with the client to determine whether it wants to litigate or arbitrate the dispute, the attorney should carefully review the language used in the arbitration provision. It may be that the arbitration provision does not provide for arbitration of part or all of the dispute. If there is an arbitrable issue, the client needs to move to compel arbitration right away, because the right to arbitration can be waived. Conversely, if a client participates in arbitration without raising any objection to it, that client could waive the right to litigate the matter. Accordingly, whether to push for litigation or arbitration is a decision that needs to be made as quickly as possible.