By Harshitha Ram
(This is the second article in a 12-part series on domestic arbitration, offering a clear guide through each stage of the process. In this installment, “The Arbitration Agreement: Drafting Effective Clauses” offers insights into creating strong arbitration agreements that set the foundation for a successful resolution. Stay tuned for Part 3: “Initiating Arbitration: Filing the Demand and Response” coming next month.)
The dispute resolution clause is often the most critical yet neglected part of a contract. While parties meticulously draft provisions for pricing, delivery, and performance, they frequently relegate this clause to boilerplate language, assuming it will never be needed. However, when disputes inevitably arise, this “afterthought” becomes the lifeline of the contract, determining how efficiently and effectively conflicts are resolved. A poorly drafted clause can derail the entire process, leaving parties entangled in costly litigation over its interpretation. In reality, this clause is not just a line in the contract—it is the backbone of the agreement’s enforceability and the key to safeguarding relationships and business interests. The importance of a well-drafted dispute resolution clause cannot be overstated, as poorly worded clauses can lead to procedural deadlocks, unnecessary costs, and delays.
—————
A Lesson from the Courts: The Case of the ‘Any Dispute Clause’
Consider an arbitration where a vague arbitration clause leading to significant confusion. The clause reads:”Any disputes between the parties will be resolved by arbitration.” At first glance, this seems straightforward. However, it lacks critical details such as the arbitral forum, governing rules, applicable laws, the number of arbitrators and other pertinent information. When a multimillion-dollar dispute arose, the parties spent months arguing over the basics: where the arbitration would occur, which procedural rules applied, and even whether the clause was enforceable. Eventually, the case ended up in court, where the judge ruled that the clause was too ambiguous to enforce. The result? The parties wasted thousands of dollars litigating the very issue they had hoped to avoid by including an arbitration clause in the first place. This highlights why clarity and specificity in arbitration agreements are non-negotiable.
—————
A comprehensive arbitration clause should address at least the following key points:
• Arbitration Rules: Specify which rules govern the arbitration in case of institutional arbitration preferences such as the AAA Commercial Rules or JAMS Rules. If the parties wish to have an ad hoc arbitration, it is primarily governed by the Federal Arbitration Act (FAA) and the parties’ arbitration agreement. If the arbitration agreement is silent on specific procedural rules, arbitrators often look to established frameworks like the UNCITRAL Arbitration Rules, which are frequently used in ad hoc arbitrations worldwide.
• Arbitrator Selection: Define the process for selecting arbitrators. Will there be one arbitrator or a panel of three.
• Venue: Identify the location where the arbitration will occur. This is especially critical in domestic disputes involving parties from different states.
• Governing Law: Specify which state’s law will govern the arbitration agreement.
• Scope of Disputes: Clearly define what types of disputes are subject to arbitration.
—————
When over-engineering backfires
Interestingly, over-engineering an arbitration clause can also create complications. In a case involving a franchise agreement, the arbitration clause spanned three full pages and included every conceivable provision—from discovery limitations to specific arbitrator qualifications. While the intent was to create a watertight agreement, the sheer complexity of the clause led to confusion. For instance, one provision required arbitrators to have at least 20 years of experience in the specific industry, effectively eliminating most qualified arbitrators from consideration. Another clause limited document discovery to 10 pages per party, which proved insufficient for resolving the case’s intricate financial disputes. This illustrates that balance is key—drafting a clause that is thorough yet practical.
A notable example emphasizing the importance of clarity in arbitration agreements is the U.S. Supreme Court case Henry Schein, Inc. v. Archer & White Sales, Inc. In 2019, the Court examined whether courts could bypass an arbitration agreement if the request to arbitrate was deemed ‘wholly groundless.’ The Court ultimately ruled that when parties have explicitly delegated the question of arbitrability to an arbitrator, courts must honor that delegation—even if they believe the arbitration claim lacks substance. This landmark decision accentuates the critical need for precision when drafting arbitration clauses to ensure enforceability and uphold party autonomy.
—————
Drafting tip: Think beyond the basics
The beauty of arbitration lies in its flexibility, and your clause should take full advantage of this. For instance, a tech company facing potential intellectual property disputes might include a clause specifying that arbitrators must have expertise in patent law.
Businesses in highly regulated industries such as finance, healthcare, or technology, often go a step further to double-protect sensitive information by including explicit confidentiality clauses in their arbitration agreements. While arbitration is generally perceived as private, these additional provisions ensure that every aspect of the process, including proceedings, evidence, and outcomes, remains strictly confidential. The arbitration clause: a gateway to streamlined dispute resolution, not just a contract filler.
It is a roadmap for dispute resolution. Take the time to tailor it to your specific needs and anticipate potential conflicts. By doing so, you can avoid the pitfalls of vague or overly complex clauses and ensure a smoother arbitration process. As the old adage goes with a clever twist, “An ounce of arbitration is worth a pound of litigation.” In the context of arbitration agreements, a few extra hours spent drafting an effective clause can save months of frustration later. Stay tuned for next month’s installment, where we will delve into the intricacies of “Initiating Arbitration: Filing the Demand and Response.” A guide on how arbitration is formally initiated, the filing process, timelines, and the Respondent’s role in answering the claim.
—————
Harshitha Ram is an international disputes attorney, arbitrator, mediator, lecturer in law, and the President of the Global Arbitration Mediation Academy (GAMA). She serves as the Chair of the ADR Section of the Detroit Bar Association and is the Publications Chair for the Arbitration Committee of the American Bar Association. To learn more or connect with her, visit: www.harshitharam.com www.adracademy.us.
(This is the second article in a 12-part series on domestic arbitration, offering a clear guide through each stage of the process. In this installment, “The Arbitration Agreement: Drafting Effective Clauses” offers insights into creating strong arbitration agreements that set the foundation for a successful resolution. Stay tuned for Part 3: “Initiating Arbitration: Filing the Demand and Response” coming next month.)
The dispute resolution clause is often the most critical yet neglected part of a contract. While parties meticulously draft provisions for pricing, delivery, and performance, they frequently relegate this clause to boilerplate language, assuming it will never be needed. However, when disputes inevitably arise, this “afterthought” becomes the lifeline of the contract, determining how efficiently and effectively conflicts are resolved. A poorly drafted clause can derail the entire process, leaving parties entangled in costly litigation over its interpretation. In reality, this clause is not just a line in the contract—it is the backbone of the agreement’s enforceability and the key to safeguarding relationships and business interests. The importance of a well-drafted dispute resolution clause cannot be overstated, as poorly worded clauses can lead to procedural deadlocks, unnecessary costs, and delays.
—————
A Lesson from the Courts: The Case of the ‘Any Dispute Clause’
Consider an arbitration where a vague arbitration clause leading to significant confusion. The clause reads:”Any disputes between the parties will be resolved by arbitration.” At first glance, this seems straightforward. However, it lacks critical details such as the arbitral forum, governing rules, applicable laws, the number of arbitrators and other pertinent information. When a multimillion-dollar dispute arose, the parties spent months arguing over the basics: where the arbitration would occur, which procedural rules applied, and even whether the clause was enforceable. Eventually, the case ended up in court, where the judge ruled that the clause was too ambiguous to enforce. The result? The parties wasted thousands of dollars litigating the very issue they had hoped to avoid by including an arbitration clause in the first place. This highlights why clarity and specificity in arbitration agreements are non-negotiable.
—————
A comprehensive arbitration clause should address at least the following key points:
• Arbitration Rules: Specify which rules govern the arbitration in case of institutional arbitration preferences such as the AAA Commercial Rules or JAMS Rules. If the parties wish to have an ad hoc arbitration, it is primarily governed by the Federal Arbitration Act (FAA) and the parties’ arbitration agreement. If the arbitration agreement is silent on specific procedural rules, arbitrators often look to established frameworks like the UNCITRAL Arbitration Rules, which are frequently used in ad hoc arbitrations worldwide.
• Arbitrator Selection: Define the process for selecting arbitrators. Will there be one arbitrator or a panel of three.
• Venue: Identify the location where the arbitration will occur. This is especially critical in domestic disputes involving parties from different states.
• Governing Law: Specify which state’s law will govern the arbitration agreement.
• Scope of Disputes: Clearly define what types of disputes are subject to arbitration.
—————
When over-engineering backfires
Interestingly, over-engineering an arbitration clause can also create complications. In a case involving a franchise agreement, the arbitration clause spanned three full pages and included every conceivable provision—from discovery limitations to specific arbitrator qualifications. While the intent was to create a watertight agreement, the sheer complexity of the clause led to confusion. For instance, one provision required arbitrators to have at least 20 years of experience in the specific industry, effectively eliminating most qualified arbitrators from consideration. Another clause limited document discovery to 10 pages per party, which proved insufficient for resolving the case’s intricate financial disputes. This illustrates that balance is key—drafting a clause that is thorough yet practical.
A notable example emphasizing the importance of clarity in arbitration agreements is the U.S. Supreme Court case Henry Schein, Inc. v. Archer & White Sales, Inc. In 2019, the Court examined whether courts could bypass an arbitration agreement if the request to arbitrate was deemed ‘wholly groundless.’ The Court ultimately ruled that when parties have explicitly delegated the question of arbitrability to an arbitrator, courts must honor that delegation—even if they believe the arbitration claim lacks substance. This landmark decision accentuates the critical need for precision when drafting arbitration clauses to ensure enforceability and uphold party autonomy.
—————
Drafting tip: Think beyond the basics
The beauty of arbitration lies in its flexibility, and your clause should take full advantage of this. For instance, a tech company facing potential intellectual property disputes might include a clause specifying that arbitrators must have expertise in patent law.
Businesses in highly regulated industries such as finance, healthcare, or technology, often go a step further to double-protect sensitive information by including explicit confidentiality clauses in their arbitration agreements. While arbitration is generally perceived as private, these additional provisions ensure that every aspect of the process, including proceedings, evidence, and outcomes, remains strictly confidential. The arbitration clause: a gateway to streamlined dispute resolution, not just a contract filler.
It is a roadmap for dispute resolution. Take the time to tailor it to your specific needs and anticipate potential conflicts. By doing so, you can avoid the pitfalls of vague or overly complex clauses and ensure a smoother arbitration process. As the old adage goes with a clever twist, “An ounce of arbitration is worth a pound of litigation.” In the context of arbitration agreements, a few extra hours spent drafting an effective clause can save months of frustration later. Stay tuned for next month’s installment, where we will delve into the intricacies of “Initiating Arbitration: Filing the Demand and Response.” A guide on how arbitration is formally initiated, the filing process, timelines, and the Respondent’s role in answering the claim.
—————
Harshitha Ram is an international disputes attorney, arbitrator, mediator, lecturer in law, and the President of the Global Arbitration Mediation Academy (GAMA). She serves as the Chair of the ADR Section of the Detroit Bar Association and is the Publications Chair for the Arbitration Committee of the American Bar Association. To learn more or connect with her, visit: www.harshitharam.com www.adracademy.us.
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