About The Author
A former law clerk to the Chief Judge of the United States Court of Appeals for the Fifth Circuit, Mr. Gerald Birnberg
is admitted to practice (and has actually appeared) before six federal circuits (the United States Courts of Appeals for the Fourth, Fifth,
Eighth, Ninth, Tenth, and Eleventh Circuits). In addition, Mr. Birnberg has been a Member of the Bar of the Supreme Court of the United
States for more than 40 years, and has argued cases before that Court twice and participated in preparation of plenary briefs and arguments
before the Court in five other cases, as well as authoring several Petitions for a Writ of Certiorari or Oppositions thereto filed in that Court.
Mr. Birnberg is Board Certified in Civil Appellate Law by the Texas Board of Legal Specialization and has argued cases or filed briefs in
more than 100 state and federal appellate cases. He is a also a member of the American Arbitration Association Roster of Neutrals and is an approved ADR provider for the United States
District Court for the Southern District of Texas.
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Arbitration
Frequently Asked Questions About Arbitration
By Gerald M. Birnberg
Arbitration is the wave of the now. Primarily because of fear that a lay jury may return a crushing verdict motivated more by emotion than dispassionate consideration of the evidence and applicable law and by distrust of the ability of jurors (and judges whose expertise may be in other areas of the law) to grasp frequently complex or technical issues often implicated in commercial disputes, savvy businesspersons are increasingly opting to submit their disagreements to the arbitral forum, rather than chance the vicissitudes of the court system. Too, arbitration offers the potential for speedier, possibly (but not invariably) less costly, final, private determination of disputes by someone (or a panel of individuals) possessing some expertise in the subject matter under consideration.
But the growing reliance on arbitration as the favored means of dispute resolution (at least in commercial settings) magnifies the importance of a heretofore often taken-for-granted aspect of business contracts — the arbitration clause. Given the burgeoning preference for arbital tribunals as the forum for determination of controversies, boilerplate arbitration clauses are no longer adequate, and the terms and conditions under which arbitration will occur must be fully considered and carefully delineated in the drafting of commercial contracts. It is not hypebole to say that the wording of the arbitration clause may well be outcome determinative in a large number of dispute resolutions.
The following is a non-exclusive list of items which should be addressed in a properly drafted arbitration clause or agreement:
What disputes will be subject to a requirement to arbitrate (generally referred to as the "scope" of the arbitration clause)?
The only controversies which parties are bound to arbitrate are those they have agreed in the arbitration clause to arbitrate. An arbitration clause can be either "narrow" or "broad," depending on what the parties specify as the arbitratable disputes. For example, a clause requiring arbitration of disputes "arising out of" or "arising under" a contract is probably limited to breach of contract claims or causes of action relating to the performance or non-performance of the agreement. A clause providing for arbitration of "all disputes, controversies, questions, or differences of any kind arising out of, related or relating to, or connected with this contract in any way, whether such dispute, controversy, question, or difference sounds in tort or contract or is based on statute or otherwise" would encompass (and require arbitration of) virtually any kind of dispute which might arise between the parties in any way involving the relationship between the parties created by or resulting from the contract, including, for example, tort claims and statutory claims (such as, for example, antitrust claims).
The key is that if the parties did not agree to submit a particular kind of dispute to arbitration, they cannot be forced to arbitrate it. Period. That makes specification of the scope of the agreement to arbitrate critical and well deserving of careful drafting at the contract stage.
Who decides arbitrability — the arbitrator or the courts?
The question whether a particular controversy is within or beyond what the parties agreed to arbitrate is ordinarily a decision for a court to make. However, the parties can agree that the arbitrator shall decide the question of arbitrability, and if the arbitration agreement or clause so provides, the arbitrator determines whether the claims sought to be arbitrated are within the contract’s arbitration clause or not. In some federal circuits, the authority of the arbitrator to determine the scope of arbitration can be found to exist solely on the basis of if the parties express adoption of a particular set of arbitration rules (such as, for example, the American Arbitration Association Rules for Commercial Arbitration), if those rules provide that the arbitrator will decide his or her own jurisdiction (as the AAA Rules do). In that circumstance, the abritrator decides the scope of the arbitration agreement.
How many arbitrators will determine the dispute?
The parties can agree to have their dispute resolved by any number of arbitrators; the choice is theirs. Since arbital awards are generally not appealable — even for disregard or improper application of the law – most lawyers and businesspersons parties prefer at least three arbitrators to hear a case (with majority rule) where the dispute involves a substantial amount of money. But multiple arbitrators cost considerably more (since the parties must pay the arbitrators’ fees) than single arbitrator arbitrations. Conversely, the lower cost objective of arbitration counsels in favor of a single arbitrator in smaller cases. Either way, the arbitration clause should designate the number of arbitrators.
How will the arbitrator(s) be selected?
The preference, of course, is for the parties to agree on an arbitrator. Agreement on that matter is, however, frequently impossible to achieve. This leaves several alternatives. One method (though an increasingly unpopular and troublesome one) is for each party to select one arbitrator and those two choose the final arbitrator; failing agreement between the party-selected arbitrators, the agency administering the arbitration or a court can designate the third arbitrator. This procedure is referred to as "party-designated arbitration." If this method is to be used, not only must the arbitration agreement so state, it must also specify if the party-designated arbitrators are to be "non-neutral" (which was the general practice until relatively recently).
The other and most common method for selecting the arbitrator is the "panel list" system, in which the administering institution provides the parties with a list of potential arbitrators with backgrounds which seem to make them particularly appropriate for resolving the issues in the case under consideration; the parties then rank those prospects and the one (or three) most preferred jointly by the parties is or are appointed to mediate that case.
The arbitration agreement (or clause in the underlying contract between the parties) must specify which method of arbitrator selection is to be used. Absent such a provision, the rules adopted by the parties or, failing such a designation in the agreement, the rules of the institution chosen to administer the arbitration will control this part of the process.
Will the arbitration be "administered" or "ad hoc"?
While the parties can agree to select the arbitrator themselves (or have a judge do it for them), several organizations offer assistance to the parties in administering the arbitration process, including providing a procedure for selecting the arbitrator and a mechanism for the institution to serve as a neutral go-between to handle communications between the parties and the arbitrator(s), as well as handling the financial aspects of the arbitration. Though administration has a cost, it is usually well worth the expense because of problems which can and frequently do arise without such professional administration. Administered arbitration, for example, provides a mechanism to break an impasse in the arbitrator selection process, replace arbitrators where necessary during the course of an arbitration proceeding, resolve objections to arbitrators, and provide other administrative services during the course of the arbitration, without having to start over from step one. Either way, it is imperative that the arbitration clause designate whether the arbitration will be administered or not and if not, how questions about the conduct of the process are to be resolved. And if it is to be administered, the agreement must designate the agency or institution which will administer it.
What rules will govern the arbitration?
Several organizations have promulgated comprehensive rules governing the conduct of arbitrations. For example, the American Arbitration Association (AAA) has rules for commercial arbitrations, construction cases, employment disputes, and other types of controversies. The International Chamber of Commerce (ICC), United Nations Commission on International Trade Law (UNCITRAL), International Institute for Conflict Prevention and Resolution (CPR), International Centre for Dispute Resolution (ICDR) (which is a division of the (AAA), London Court of International Arbitration (LCIA), and, Judges Arbitration and Mediation Service (JAMS), all have promulgated rules for abritral proceedings. The arbitration clause should select one set of rules to govern cases to be submitted to arbitration under that contract.
Are there any conditions precedent to arbitration?
Increasingly, parties are agreeing to "meet and confer" prior to initiating arbitration, in an effort to resolve their dispute, and often they are agreeing to submitting the dispute to mediation, either or both prior to initiating arbitration. While these processes frequently achieve resolution of the dispute without, and therefore obviate the need for, resort to the more expensive and contentious arbitration procedure, it is a good idea to place a time limit for completion of those pre-arbitration proceedings so arbitration is not forestalled interminably awaiting completion of those other dispute resolution techniques.
Is there to be a time limit on completing the arbitration and if so, what is it to be?
Not only can the parties agree to a timetable within which the arbitration case must be heard (which is typically a bad idea to include in the arbitration clause because the parties cannot anticipate the scope of all disputes which might arise and, at all events, cannot possibly know the eventual arbitrator’s schedule at the time the arbitration agreement is entered into), they can designate a time deadline for rendition of the arbitral award. Most arbitration institution rules provide such time limits, too, but if the parties wish to modify those times, their agreement should accomplishment that result.
Where will the arbitration be conducted (situs)?
Selection of the site for arbitration is very important both for the ability to get witnesses to attend the arbitration hearing (especially given the limited depositions which may be available in an arbitration proceeding and limitations on the ability to subpoena witnesses to arbitration hearings) and for the pool of potential arbitrators. While there is no requirement that arbitrators live in the community where the arbitration is conducted, avoidance of travel cost expenses and just the mechanics concerning how administering institutions submit lists of potential arbitrators to the parties counsels in favor of giving this issue real thought at the arbitration clause negotiation stage.
In what language will the arbitration hearing be conducted?
Obviously, this is a crucial issue in arbitrations between parties located in different parts of the world. While translators are permitted in arbitration hearings, the parties should agree at the front end on the language in which the arbitration hearing will be conducted.
Are arbitration proceedings to be transcribed and if so, who is to arrange and pay for the transcriptions?
Transcripts may be useful in preparing post-hearing submissions to assist the arbitrator in remembering the testimony on which the outcome should be based and arguing what the evidence was. But they are not a mandatory part of arbitration hearings. While the arbitrator may (and usually will) allow a party to have a court reporter transcribe the testimony (at the parties expense), the costs are not taxable, unless the agreement of the parties makes it so.
What will be the limits on, or availability of, discovery?
Generally, the discovery which will be available to parties in arbitration is governed by the discretion of the arbitrator(s) and/or the applicable rules of the administering institution, and ordinarily much more limited than that the parties would find available in a court litigation of the dispute. By agreement in the arbitration clause, however, the parties can specify the discovery which will be available in an arbitration proceeding, and that designation in the parties’ agreement will “trump” lesser discovery provided for in the rules of the administering institution or the arbitrator’s exercise of discretion. The types and extent of discovery (depositions and document production being the most frequently allowed types of discovery in arbitrations) can be described in the arbitration clause in the underlying contractual agreement, and if identified there, will be allowed in an arbitration proceeding. In some cases, the parties may conversely wish to restrict discovery to types or numbers even more limited than would otherwise be available in an arbitration proceeding. But, like essentially all other aspects of the arbitration process, the agreement of the parties, as set forth in their agreement ot arbitrate (ordinarily part of the underlying contract) will prevail and control.
Is class action arbitration permissible?
If multiple parties have similar disputes can they all be handled in a single "class action" arbitration? Parties can only be required to arbitrate disputes they have agreed to arbitrate, so class action arbitration is unavailable if precluded by the arbitration clause.
What kind of arbitral award is to be rendered ("reasoned," "itemized," or "simple")?
Since arbitral awards are non-appealable, a "simple" ("I find for X and award $Y") is often sufficient. On the other hand, if a party makes a timely request and/or the arbitration clause so provides, the parties can demand a "reasoned" decision from the arbitrator in which the arbitrator(s) explain the basis for the award. A "reasoned" award is, of course, more expensive than a "simple" award, but frequently the parties want to know why the arbitrator(s) ruled the way he, she, or they did — the reasons behind an arbitrator’s award, (1) so they can conform their conduct accordingly in the future, (2) to assure that the arbitrator has considered all the evidence and legal theories (although there may be no remedy if she has not), (3) to focus the arbitrator’s attention in deciding the controversy, or (4) just to know how the arbitrator(s) viewed the case. In either case, the arbitration clause should specify the type of arbitral award ("reasoned," "itemized," or "simple") which will be rendered should the process be invoked.
What remedies can the arbitrator(s) award and what types of relief is prohibited?
Unless contractually precluded from doing so, arbitrators are authorized to award any kind of relief he, she, or they deem appropriate. This can include punitive damages, statutory damages, compensatory damages, consequential damages, specific performance, injunctive relief, declaratory relief, or anything else the arbitrator(s) choose. The parties, in their arbitration agreement, can limit the types of relief an arbitrator may award, such as, for example, eliminating punitive damages. But these limitations must be expressly set forth in the arbitration agreement itself.
The arbitration agreement can (and usually should) also specify whether and to whom attorneys fees can be awarded and how the costs of arbitration are to be assessed. Costs of arbitration can include parties’ costs (such as expert witness fees, attorneys fees, deposition costs, translators fees, court reporter costs (if the hearing testimony is to be transcribed), and litigation-type expenses) and arbitration costs (case administration fees and arbitrator(s)’ fees). Certain rules of some institutions have specific provisions in this regard, and they must be consulted. For example, the AAA rules for commercial arbitration provide that if both parties seek attorneys fees in an arbitration proceeding, the arbitrator can award (or not award) such fees in the arbitrator’s discretion, or apportion them (or not) in whatever manner the arbitrator sees fit. The availability of pre-award and/or post award interest should also be addressed in the arbitration clause. And with regard to how all these costs are to be assessed and apportioned should be specified in the arbitration agreement.
What law is to control resolution of the legal issues in the arbitration matter?
This is an especially crucial matter where the parties reside in different jurisdictions (i.e., different states or different nations).
Are the arbitration proceedings and information revealed during the process to be confidential?
Although arbitration proceedings are generally private (not so, of course, if a party invokes judicial process to vacate or confirm and enforce an arbitral award), this does not mean they are confidential, unless the parties agree to make them such in the arbitration agreement itself. If confidentiality is desired, the clause must so specify and describe the scope of or exceptions to confidentiality of the arbitration proceeding itself and of the information obtained during the course of those proceedings.
Do the parties consent to a court judgment confirming the award?
This is a very technical issue on which there is disagreement among the courts. Some courts have ruled that the arbitration agreement itself must expressly authorize a court to enter judgment upon an arbitration award. Other courts have found such authority implied from the underlying contract designating arbitration for dispute resolution and/or the conduct of the parties in arbitrating a dispute. To be safe, the arbitration clause should expressly provide for judicial enforcement of the award in accordance with applicable state or federal arbitration acts or law.
Do the parties consent to jurisdiction of a court seeking to enforce an arbitral award?
Similarly, court have repeatedly required a showing of in personam jurisdiction for enforcement of an arbitral award. This, too, is a fairly complicated area of the law, but prudence would dictate that the arbitration clause contain a provision consenting to jurisdiction in various places where enforcement of an arbitral award might be sought.
Not every commercial agreement need address every one of the above listed areas, and there may be other provisions which should be included in some other particular kinds of contracts. The point of this article is simply to encourage parties to think far more seriously about arbitration clauses in contracts which, like an increasing number of sophisticated businesspersons, are going to specify that disputes be submitted to arbitration, rather than going the court route. Counsel representing such parties should be directed by their clients to pay particular attention to this critical aspect of commercial contracts and to consider thoroughly all of these areas when drafting agreements which provide that arbitration, rather than the judicial process, shall be the process for resolving disputes.
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