Drafting arbitration clauses: Avoiding the 7 deadly sins

Dispute Resolution Journal, Feb-Apr 2003 by Townsend, John M

Too often, drafters of arbitration agreements attempt to reinvent the wheel. There are time-tested arbitration clauses that work well and are easily adapted to transactions the parties plan to enter. John Townsend tells drafters how to avoid the most common pitfalls-or deadly sins-and how to draft the clause the right way. In so doing, drafters can steer clear of such problems as over-specificity, ambiguity, conflicting clauses, and other problems.

From time to time, someone tries to define what a perfect arbitration clause would look like. Efforts to do so usually founder on one of the strengths of arbitration, which is its adaptability to the particular circumstances of the parties and the dispute.Therefore, while it is difficult to generalize about what would make a "perfect" clause, it is not nearly as difficult to identify some of the features that make for a bad one. This article identifies seven of the most damning "sins" that plague arbitration clauses and offers suggestions for addressing the most important issues drafters face.

Equivocation

Credit for identifying the sin of equivocation as the cardinal sin of arbitration-clause drafting goes to Laurence Craig, Rusty Park and Jan Paulsson, who so named it in their book International Chamber of Commerce Arbitration.1 The essence of this sin is the failure to state clearly that the parties have agreed to binding arbitration. Because arbitration is a creature of contract, if there is no contract, there is no agreement to arbitrate.

Craig, Park and Paulsson's example of an equivocating clause has a certain Gallic simplicity:

In case of dispute, the parties undertake to submit to arbitration, but in case of litigation the Tribunal de la Seine shall have exclusive jurisdiction.

What this clause commits the parties to is nothing other than years of litigation about how to resolve any dispute that may arise. That is the sulfur and brimstone that threatens the drafter who puts such a clause in the client's contract: The client will spend what will seem like an eternity, and a great deal of money, trying to resolve the dispute.

The overriding goal of the drafter of an arbitration clause should be to draft a provision that, if a dispute arises, will help the parties obtain an arbitration award without a detour through the court system. First and foremost, that means that the drafter must produce an enforceable agreement to arbitrate. For an American lawyer drafting an agreement that will involve a transaction in interstate commerce, that means an agreement that a court will recognize as coming within the meaning of Section 2 of the Federal Arbitration Act. This provision states:

A written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.2

Each state has its own arbitration act,3 but if the FAA applies to the arbitration clause (as it often does), it will preempt any inconsistent state law.

For an international lawyer, the touchstone of arbitration drafting is Article II.1 of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonlny known as the New York Conation.4 It provides:

Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which ... may arise between them ... concerning a subject matter capable of settlement by arbitration.

Thus, an unequivocal clause that does not firmly commit the parties to arbitrate their disputes will not be enforced under either the American or international standard.

Inattention

Anyone who regularly deals with arbitration has no doubt heard someone say, "No one really paid any attention to the arbitration clause," explaining that the drafters decided at around 2:00 a.m. on the morning on the day of the closing that they should provide for arbitration and pasted in a copy of the nearest clause available.

What this describes is the sin of inattention: drafting an arbitration clause with insufficient attention to the transaction to which it relates. This is far from the ideal approach. An arbitration clause should be designed to fit the circumstances of the transaction and the parties' needs. The drafter may well select a standard "off-the-shelf" clause prepared by one of the well-known arbitration institutions-one can do far worse-but the off-the-shelf clause should only be selected because it is right for the deal.

When advising a client about dispute resolution options and deciding on the type of clause to use, the drafter, at a minimum, should ask the following questions:

* What type of dispute resolution process is best suited to the client and the transaction?

Arbitration is not the only option. There are many alternative dispute resolution processes and there is always litigation. In particular circumstances it may be preferable to litigate in court, provided that the parties can agree on which court to designate and whether that court will have jurisdiction. Litigation, however, may not be an option in an international agreement.