Arbitration Clauses: Careful Drafting Pays
Arbitration can be an efficient means of resolving disputes of any size or complexity. The Federal Arbitration Act (“FAA”) and the American Arbitration Association (“AAA”), among others, each provides a framework that parties to a contractual agreement can use when addressing dispute resolution. However, unless the contractual provisions addressing arbitration are carefully and thoughtfully drafted, what should be an efficient exercise in dispute resolution can become an expensive mess.
The arbitration clause of a contract has become one of the most frequently litigated of all contract clauses. It is at the drafting stage where parties to a contract must pay attention to the specific language of the arbitration clause. This is your opportunity to take advantage of mutual good will and cooperation to forge a clear working document both sides can live with. While a great deal of time, effort and energy is devoted to the details of the contract, including scope of work, specifications and pricing etc., far too often the parties treat the arbitration clause as an afterthought or so-called “boilerplate”. Frequently this results in an arbitration agreement that is overly broad with important details completely unaddressed.
One of the important details that must be addressed is the power and authority of the arbitrators. An attractive aspect of arbitration is that the parties are free to negotiate and agree to various limitations on the power of the arbitrators which, if properly drafted, can allow the parties to realize arbitration’s potential benefits in terms of efficiency, cost and predictability.
When a party to a dispute realizes that the arbitration has gone badly and resulted in an adverse decision, if the arbitration clause was left broad and general, there may be no remedy available at the courthouse. This is because there is a very strong judicial policy favoring arbitration. Any ambiguities regarding the scope of the arbitration clause are usually resolved in favor of arbitration. In other words, courts are very reluctant to overturn an arbitration decision and will bend over backwards to interpret the clause in a way that supports and sustains the arbitrators’ decisions.
One of the few ways to attack an adverse arbitration result is found in FAA §10(a)(4) or similar Rules. This section authorizes a decision to be vacated where the arbitrators “exceed their powers” such as when they make an award contrary to the clear limitations on their authority set forth in the arbitration agreement. It should therefore be obvious that parties desiring to limit the arbitrators’ authority should do so in clear, unmistakable language. Any limitations on the arbitrators’ authority should be stated and fully described in the arbitration/dispute resolution section of the contract itself. Do not expect a court that has been asked to review an arbitrators’ award to search through the contract and piece together what the aggrieved party claims are limitations on the arbitrators’ authority.
While disputes over arbitrators’ authority can involve various topics, the most frequent one I have observed involves the arbitrators’ authority to make an award of attorney’s fees and costs. If the parties wish to limit the arbitrators’ ability to award attorneys’ fees and/or costs, it should be done in clear and unambiguous terms. For example, rather than simply say “fees are not recoverable” it would be far better to say something like “under no circumstances will the arbitrator be authorized to make any award of attorneys’ fees or expenses”. Alternatively, if the contracting parties wish to allow for recovery of attorneys’ fees, I recommend language along these lines: “The arbitrator shall award the prevailing party its reasonable and necessary attorneys’ fees incurred in connection with this proceeding”. It might also be advisable to define the types of costs that are recoverable including a statement as to whether “costs” includes experts, depositions, travel and etc.
Careful parties to a contract will take advantage of the opportunity to craft an arbitration agreement that is clear and useful in the event a dispute arises. These clauses should not be treated as “boilerplate” any more than the provisions defining scope and payment.
About the Author
John L. Grayson, Esq. is a principal in the Houston, TX office of Cokinos, Bosein & Young.
Articles published in The Expert Report are the opinions of the authors and do not necessarily represent or reflect the policies or opinions of The Rhodes Group. The Expert Report may not be reproduced in whole or in part without the permission of the publisher.