Laurin: Here’s how to draft an effective arbitration provision

Many articles debate whether arbitration or litigation is the preferred method of dispute resolution. My only comment on this debate is that if your client wants to approach arbitration the same way the client approaches litigation, then arbitration does not make sense for your client.

I say this because arbitrators are not free, discovery costs will be virtually the same under this approach, and while civil appeals are not that common, any thought that you can appeal an arbitration decision on the merits is a fool’s errand.

Subject to this comment, the balance of this article addresses how to craft arbitration provisions that are consistent with the three well-established goals of arbitration: expertise in the subject-matter area; lower costs; and quicker resolution.

The first goal of expertise seems readily apparent but is often ignored. In my practice area of construction litigation, the American Arbitration Association has a separate practice area of construction law, so construction lawyers know that they will get arbitrators who have at least some subject matter knowledge.

But there are many agreements which specify arbitration outside of construction law. If you visit the association’s website and navigate to “practice areas,” there are seven practice areas listed.

One practice area is “commercial,” and it lists 20 areas of expertise in that area. One example is “partnership and shareholder.” If parties have a transaction in this area with an arbitration clause, it is simple to add arbitrator qualifications such as years in practice, expertise in partnership-shareholder transactions, experience arbitrating such transactions, or other relevant skill sets.

While the association has competent arbitrators in this area, specifying additional criteria enhances the chances of getting arbitrators that have the requisite subject matter expertise. I use the association as an example, but there are other arbitration services (such as JAMS) that provide a roster of arbitrators. Additionally, the parties can create a private arbitration procedure.

Drafting an arbitration provision requires some serious thought, because at the time the provision is drafted, the parties do not know the nature of the dispute and how much money is at stake.

One example of how not to do it is a clause that I have seen to the effect that “the federal rules of evidence and the federal rules of civil procedure apply.” At risk of painting with too broad of a brush, examples like this reflect the fact that transaction lawyers, rather than litigators usually draft arbitration clauses.

An example of how to do it is to set meaningful and realistic deadlines for the parties to voluntarily: disclose witnesses they believe will actually testify (not the standard kitchen sink witness list in litigation), state the amount of damages claimed and how they are calculated, provide documents supporting the damages, and disclose all documents the parties believe to be relevant.

Think about the concept of initial disclosures in federal court but at a time when the parties have enough time to truly make meaningful disclosures, with a final deadline that should be limited to additions that in good faith were not known previously. And there must be consequences, or at least the threat of consequences, for a party that “sandbags.”

Another strategy is to limit the number of depositions and requests for production, eliminating interrogatories (which rarely provide any useful information), and having agreement by the parties that the voluntary disclosures stated above should be a substitute for much discovery that would otherwise have to be done in litigation.

One specific example is to specify the ability to take a30(B)(6) deposition, and to provide that the federal rules or Indiana rules regarding 30(B)(6) depositions apply (a rare but important use of trial rules in an arbitration). 30(B) depositions bind the entity and go a long way to avoid the need or desire to take the deposition of every person who has any involvement in the dispute.

While the amount at stake does not necessarily determine the complexity of a dispute (although I always say the more money at stake, the more issues there are, real or imagined), it would be naïve to not factor in the amount at stake when drafting an arbitration clause.

One way to generally address the issue is have two different tracks depending on the amount at stake. By way of example only, if the total amount at stake is less than $750,000, the parties get two depositions (including the 30(B)(6) deposition), and if it is more than $750,000, then the parties get a total of four depositions.

And if you are talking a significant dollar amount of claims, then the parties may want a three-arbitrator panel. In my construction practice, a common way this is addressed is to provide that each party gets to pick one arbitrator, and these two arbitrators pick the third arbitrator, who also functions as the chair.

Here is one clause that I have used to try to enhance the chances that arbitration will be conducted consistent with its stated goals and what I have outlined in the preceding paragraphs:

“Purpose of these procedures. The Parties agree that the purpose of these dispute resolution procedures is to rely on the parties’ good faith to voluntarily disclose all witnesses and documents supporting their claims and defenses (with the corresponding reduction in the amount of discovery needed) so that the parties can adequately prepare for the arbitration in an efficient and timely manner relative to the claims involved and the amount(s) at stake. To the extent the Parties seek assistance from the arbitrator/arbitral panel relative to the voluntary disclosure of claims or information, discovery, or any other procedural matter; the arbitrator/arbitral panel shall give great weight to the purpose expressed in this section.”

This provision gives the arbitrators some meaningful guidance with the additional benefit of knowing what the claims are and the amounts at stake.

The last goal of arbitration is an expedited decision. If the parties agree to relatively limited discovery that is proportionate to the issues at stake, then that unquestionably as a practical matter helps to get an expedited decision. That being said, one size does not fit all for how soon a hearing should take place.

One final thought that touches on what has been discussed above: Everyone knows how expensive litigation is and that most cases settle.

One potential effective use of arbitration is to provide that the parties will arbitrate claims provided that the total amount at issue does not exceed a threshold amount. A threshold amount can be whatever the parties characterize as worth fighting about, but not likely requiring a full-blown litigation effort.

Under this scenario, agreeing upon an agreed upon limited discovery plan, etc., should be easy to implement. And most importantly, getting a hearing date will very likely lead to a settlement of the dispute.•

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Sam Laurin is chair of the construction law group at Bose McKinney & Evans LLP and a registered mediator in the state of Indiana. Opinions expressed are those of the author.