Business & Corporate Articles

Arbitration and Dysfunctional Drafting

“A cautionary note - we spend too much time trying to make sense out of arbitration agreements precisely because litigants spend too little time drafting them. Increasingly, we have been presented with incoherent hybrids and bizarre mutations of supposed agreements for judicial or contractual arbitration.” National Union Fire Ins. Co. v. Nationwide Ins. Co. (1999), 69 Cal. App 4th 709, 717.

Arbitration is intended to be more expeditious and less expensive than litigation and, when conducted properly, it usually is. However, as the 40-page handout for the January 22nd program (“Drafting and ADR: The Clause That Could Control Your Case”) demonstrated, dysfunctional drafting of dispute resolution clauses has often led parties to time-consuming and expensive trial and appellate court proceedings and, at the same time, necessitated calls by too many attorneys to  their malpractice carriers. From the hundreds of case citations and anecdotes in the handout demonstrating how not to draft a dispute resolution clause, I’ve been asked to add a few general observations.

I usually recommend a stepped clause providing for mediation followed, if necessary, by arbitration. There’s no reason not to give mediation a chance but, if the scope of the arbitration is to be the same as that in mediation, it’s important that the wording be parallel. A broad clause relating to “anything arising out of or related to” a contract usually applies to any contractual disputes that arise, but it’s advisable to indicate the clause is intended to cover all disputes regardless of whether they’re pled as contract, tort, statutory or other claims (if that’s the intent).

Rather than try to cope individually with the thirty-or-so issues some indicate should be covered in all arbitration clauses, it’s generally preferable to specify that disputes will be administered by a recognized provider pursuant to that provider’s rules. Major providers spend a lot of time staying abreast of changes in the law, tracking issues in thousands of arbitrations and drafting rules designed to cover a plethora of legal and administrative issues. Parties could then augment that with a clear venue provision, desired qualifications for an Arbitrator and other provisions deemed helpful for possible disputes.

Don’t deprive the process of its inherent flexibility - one of its major advantages - by providing for full litigation-style discovery and motion practice. Written discovery is usually inimical to the process. Unending depositions can be oppressive for the parties (i.e. the clients paying the bills), but key depositions, sometimes with negotiated time limits, can benefit the process. Good Arbitrators will make sure the parties get the discovery they need and most disputes can be handled with a phone call instead of lengthy motions, points and authorities, and opposition papers. Similarly many Arbitrators order that there will be no motions without the consent of the Arbitrator. If an issue isn’t resolved by telephone and the motion seems appropriate, time limits (e.g. for a motion for summary judgment) don’t have to track those applicable in litigation. For employment clauses, parties should review Armendariz v Foundation Health Care (2000) 24 Cal. 4th 83.

When designating a provider, make sure the provider still exists and will handle the type of disputes likely to occur (e.g. if a designated provider no longer exists, a party may argue it no longer has to arbitrate; in several matters contracts designated the Cheyenne River Sioux Tribe that does not administer arbitrations). Some providers won’t administer a matter if a party is self-represented. Some won’t administer credit card disputes. Some won’t administer nursing home disputes pursuant to pre-dispute agreements.

It’s also important to review the designated rules. For example, since commercial arbitration is a matter of contract, rules of the AAA usually permit a recovery of attorney fees if all parties request such an award, even if fees are not otherwise recoverable. Providers also occasionally change their rules. In Evans v. Centerstone Development Co. (2005) 134 Cal. App. 4th 151, Claimants argued JAMS’ rules in effect when the agreement was signed should apply. Those rules said they could be amended without notice and rules in effect on the date of the commencement of an arbitration would apply unless the parties specified another version of the rules, something they had not done.

Similarly, when specifying applicable law, drafters should acquaint themselves with the law they’re designating. The arbitration provision in Peleg v. Neiman Marcus Group, Inc. (2012) 204 Cal. App. 4th 1425, said it was governed by Texas law and the FAA. The provision in Harris v. Bingham McCutchen, LLP, (2013), 214 Cal. App. 4th 1399, specified Massachusetts law. Drafters were apparently unaware of provisions of the designated state laws that made the involved arbitration clauses unenforceable. The same is true internationally as numerous parties discovered to their dismay when they learned the China International Economic and Trade Arbitration Commission (CIETAC) had changed its rules regarding the venue for hearings if not specified in the parties’ contract.

Finally, as basic as it may seem, pay attention to words and punctuation. In a San Diego case, drafters who prepared a mutual release of all claims misunderstood the meaning of “respective” thereby giving rise to a new lawsuit and in several cases the misuse of a comma created ambiguities that were construed against the drafter. Too often when reading a draft, we “read” what we think we said without noticing that a word is missing or misspelled. Once satisfied with the clause that has been written, drafters may want to wait and review it with a clear head the next day and possibly have it read by an associate. Then read it again..

—​ Carl Ingwalson Jr.

**This article is for information purposes only and does not contain or convey legal advice.  The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting an attorney. Any views expressed are those of the author only and not of the SDCBA or its Business & Corporate Law Section.**