What is an Arbitration Agreement?
An arbitration agreement is a written provision in any contract to submit any existing controversy or any future controversy to arbitration as a substitute for litigation before the courts. It acts as a private legal agreement amongst the parties, which substitutes for the judicial system any agreement to use voluntary arbitration to adjudicate disputes. An arbitration agreement specifically sets forth the terms and conditions under which the parties agree to submit their future disputes to arbitration. The obvious reasoning for an arbitration agreement is to avoid litigation in the courts of law, and instead use a private, and often confidential, proceeding to resolve the dispute, usually amongst the parties’ chosen professionals as arbitrators to decide the case, not judges. The intent is that the decision will be final and binding on the parties.
Simply put, an arbitration agreement sets the ground rules in advance of the dispute, outlining the procedures for resolving a controversy that would otherwise involve the courts. It’s usually a provision in a contract that expressly describes the process for resolving a dispute between the parties to the contract without need for litigation. Of course, the goal is to come to a resolution without the need for arbitration, but the arbitration agreement is the option if the parties are unable to resolve the issue amongst themselves . The rationale for an arbitration agreement is that the parties can identify the legitimate concerns and interests without need of an adversarial process, and can voluntarily agree to settle the issues that will presumably arise in the future, as well as agreeing to an independent arbitrator to fairly resolve the matter.
Most significantly, once executed, the Federal Arbitration Act affords arbitral awards the same level of respect and enforcement as a civil action judgment. The primary purpose of the Federal Arbitration Act is to promote arbitration as an alternative to litigation and to enforce agreements to arbitrate. It encourages private dispute resolution and limits court intervention. Consequently, if the parties have negotiated their arbitration agreement, it becomes legally enforceable under the federal law.
The point of an arbitration clause is to place your feet firmly in the ground, as firmly and as unshakably in the ground, as you can place them, so that when the time comes in the future for the court to look at the substance of whether it will involve the court or the arbitration tribunal to resolve the issues, the court will regard the prior agreement not only as a meaningful legal document, but as a contract the parties expressly agreed to, and therefore one the parties have no problem enforcing.
Essential Elements of an Arbitration Agreement Template
An arbitration agreement template should contain several key components. While employment contracts and agreements can choose to vary from the default rules, the following are the general elements found in every arbitration clause:
Scope of arbitration – clearly define what types of issues are to be arbitrated under the arbitration agreement.
Selection of arbitrators – in some cases, the parties select a three member arbitration panel to hear disputes, while in others, a single arbitrator is sufficient. The parties may also specify the qualifications of the arbitrators who will be selected, such as whether they must be attorneys or industry experts.
Venue for arbitration – the arbitration location should be convenient for both the employer and the employee.
Rules governing the arbitration process – in the absence of specific rules, the American Arbitration Association will be called upon to provide rules to govern the process.
The above components are not the only ones that should be included in an arbitration agreement template. However, the above items are essential to a properly drafted arbitration agreement. Parties using an arbitration agreement template that do not contain these components run the risk of having their arbitration agreement invalidated if a dispute arises.
Benefits of Having an Arbitration Agreement
The benefits of arbitration over judicial litigation are many, especially in California. Arbitration is in most cases advantageous over the cost and time associated with litigation. The costs associated with hiring lawyers to file pleadings, going through discovery, court dates, and trial dates, lawyers fees for trials or appeals, appeals court costs, etc. can quickly spiral into the hundreds of thousands. Arbitration removes a large part of this process and lessens the costs to the parties.
Arbitration proceedings are generally less formal than court proceedings. In California, arbitrations are conducted by judges and or retired judges, who are generally quicker and more experienced in rulings and decisions than civil judges are. This is particularly helpful in California where judges are underfunded and have huge case loads. California Civil Judges are assigned approximately 400-800 new cases per year, and spend only a few minutes with each litigant, so they can spend most of their time on the cases that take more money and are more complex. On the other hand, retired judges contracted through arbitration firms often decide many hundreds of cases in a year, and have the opportunity to really focus on the nuances of the case, rather than the usual formalities of Court. For example, the business decision of value of the case to the client may be better explained directly to a neutral judge in person.
Arbitration also allows for confidentiality regarding settlement proposals and outcomes as arbitrations are not subject to the California Public Information Act. A typical litigation is fought in public with pleadings and motions filed with the Court and public records, and the final resolution entered with the Court and available to the public. Whereas, a typical arbitration allows the parties to keep all of the facts of the case confidential and the final arbitration award is a private record.
The finality of arbitration decisions are also considered a benefit by the parties to an agreement. Litigation and appeals can go on for years often prolonging the outcome. Whereas, an arbitration award is final and binding on the parties. There are limited grounds for appealing an arbitration award and overturning arbitration decisions, which means that the parties know that an arbitration award is likely to be irrevocable.
Finally, arbitration is often faster than litigation. Typically arbitrations are scheduled within a few months of the agreement to arbitrate, whereas court litigation is often calendared for a year or more depending on the civil division of the court. Further, arbitrations are usually completed within a few days whereas litigation cases may take weeks or months to litigate. This aspect of arbitration results in reduced costs, including attorney fees.
Common Mistakes to Avoid
While it is natural to think the wild and wooly world of litigation may be hazardous to your company’s health, the untamed world of arbitration is not without some nasty teeth. Four of the more common mistakes are: (1) using ambiguous language, (2) failing to address applicable law, (3) omitting applicable rules, and (4) failing to address arbitrator selection. If you want to avoid having a court disregard your carefully crafted arbitration agreement, or, even worse, enforce a clause – such as an offset provision – that may be illegal under state law, be careful in how you define the scope of arbitrability. If the arbitration clause has not defined what is arbitrable, then a judge may have to decide that issue on the privity of the parties at the inception of the clause, or by reference to rules of general applicability as opposed to specific discharge provisions. Indeed, in a lawsuit that pit the consumer bills of lading against the shipper’s bills of lading in the U.S. Southern District of New York, the Court refused to enforce the arbitration provision because the properly negotiated clause would not have allowed for the issues at hand to be arbitrated. Similarly, a Georgia employer lost in arbitration because it unilaterally amended its arbitration policies mid-claim, and then sought to compel arbitration of the amended policies, even though the employees in question had commenced their action prior to the change. The court said the employees had no notice of the change to the arbitration policy and rejected the employer’s efforts to use post-dispute arbitration policy against its employee. In selecting arbitration rules, parties should avoid ambiguity by unambiguously specifying which body of rules will govern the arbitration, and how the rules can be amended. Using rules of a service such as AAA or CPR, in addition to indicating which specific office shall administer the arbitration, is an easy way to add certainty is to use precise and defined language. Actually naming the service in addition to the rules may also help avoid jurisdictional issues down the road. Further, it is a good idea to specify the forum wherein the arbitration will take place, such as: English only, English and Mandarin, etc. Having a specific forum makes it easier for your company to control and monitor the proceedings.
How to Edit Your Arbitration Agreement Template
Even with a substantial number of arbitration agreement templates available, use of one without customizing to fit the particulars of your situation is ill-advised. Most templates are from prior experience. They are not guaranteed to hold under the scrutiny of a court in your specific situation. For starters, most arbitration agreements will include a choice of law provision. At a minimum, you will need to change the state/country that is the subject of your arbitration agreement.
Does your contract involve more than one jurisdiction? Create the arbitration agreement so that it references each jurisdiction, which can help avoid subsequent venue disputes. For example, if you have a contract with multiple parties, one of which resides in a different jurisdiction, it is often beneficial to include the rules of the other jurisdiction.
Arbitration agreements must be clear, concise and specific. For example, if you are a business in the healthcare industry, and have a parent company in Illinois, you might want to make sure that persons covered by the arbitration agreement are employees and/or contractors who work for the parent company. If you are in a different industry , such as securities or international trade, you would want to provide specific references to securities and trade laws.
Also, consider whether you want references to rules other than American Arbitration Association rules in your template. There are many rules that you could follow such as those of the American Arbitration Association, FINRA, CEDR or ICDRC, to name just a few.
You can customize your arbitration agreement template by adding definitions. For example, if you are dealing with medical records, you may want to define the term "medical record," or define who qualifies as an "expert." When you customize your arbitration agreement, you can craft the definition section to make sure it is specific enough to meet your needs.
Customizing your arbitration agreement template allows each of the parties to agree to the same set of terms. For instance, you could require the parties to agree to no more than three days of hearings and no more than a 14-day notice to the parties that a hearing will occur. By customizing a template arbitration agreement, you have the chance to enforce the specifics of that agreement in a customized way.
Legal Considerations in Arbitration Agreements
Given the contractual nature of arbitration, the legal implications and potential issues related to arbitration agreements are critical to review and understand. For example, the most important consideration in regards to enforceability of arbitration agreements is the actual content of the agreement. In short, if the language of the arbitration agreement is deemed by a court or agency to be either unconscionable or hidden, it can be deemed unenforceable. Since these terms are more clearly defined in the Financial Industry Regulatory Authority in customers’ rights and responsibilities, as well as the Americal Customer Account Management Agreement, rules regarding the hiding or concealing of contractual terms are fairly clear.
However, a few aspects of the language of an arbitration agreement or additive documents need to be considered (although this is still not an exhaustive list). For example, how should the choice of law be handled? What if the choice of law is in a different jurisdiction from where the firm is located, where the client resides, or where the arbitrator(s) are located? Also, it is critical to confirm that any and all relevant regulations have been met or considered when designing the agreement. Regulations can include the Securities Exchange Act of 1934, Rule 10b-5, and FINRA rules, district guidelines and case law.
Choosing the Right Arbitration Agreement Template
As with so many other contractual situations, there is no one-size-fits-all arbitration agreement template, but rather, it is important to evaluate the type and complexity of your industry and your business, as well as the nature of your contractual relationships, in order to choose an appropriate arbitration agreement template. For example, a builder or general contractor might need an arbitration agreement template that is extremely detailed and specific to his or her industry, while a debt collection agency might need one that is more "plain vanilla," or straightforward and uncomplicated. Additionally, in some cases, such as disputes with a consumer, an arbitration agreement template drafted to anticipate the plaintiff’s claims and defenses , may be appropriate. Other times, a more general arbitration agreement template is recommended.
In order to find arbitration agreement templates that would be a good fit for your particular needs, you might start by searching the Internet in an attempt to obtain reliable and inexpensive arbitration agreement templates. Such templates are readily available online and may be a good starting point. Another option is to search through books at the library or purchase those books that contain arbitration agreement templates. However, as with all of your contract drafting decisions and research and preparation steps, it is best to consult with an experienced attorney to obtain advice on what type of arbitration agreement template is best for your specific needs.
