Arbitration has become an increasingly favored method for solving business disputes. The advantages for choosing arbitration are oft cited: speedier resolutions than court proceedings, less expense, confidentiality, and, in many cases, limits on discovery, especially third-party discovery.
What, however, are the potential pitfalls of arbitration, and how might they be addressed in the parties’ arbitration agreement?
“First and foremost, your have to know the scope of the arbitration agreement,” says H. Eugene Lindsey III, a member of the litigation department at Katz Barron Squitero Faust. “The agreement may cover a specific transaction, a series of transactions, or the entire relationship between the parties. It may cover all disputes, or it may be limited to particular kinds of actions.”
Smart Business spoke with Lindsey III about arbitrations and arbitration agreements, the pros and cons of them and what to know when you’re involved in them.
After the scope of the arbitration agreement, what should you focus on next?
First, if there is a dispute as to the scope of the arbitration agreement, who decides that dispute the arbitrator or a court? The parties should consider setting forth a designation in their agreement. Also, in many instances, there may be several contracts between the parties. Some may have arbitration agreements; others may not. When entering into a new contract and deciding whether and to what extent it shall contain an arbitration agreement, prior contracts should be reviewed. If, for example, a prior agreement provides that all disputes arising out of or connected with the relationship are subject to arbitration, then a case can be made that subsequent contracts are governed by the prior agreement absent language disclaiming that fact.
Likewise, if the parties desire the prior agreement to arbitrate to control the new contract, then this should be expressly stated. Another issue is whether the language of the arbitration agreement is limited to the parties to the contract or whether the language is left indefinite. For instance, does the agreement state: ‘All disputes between the parties shall be subject to arbitration’ or, merely, ‘All disputes shall be subject to arbitration’? In the latter case, a non-party to the agreement may seek to claim the benefits of the arbitration agreement, though, as a non-signatory to the agreement, it could not be forced to arbitrate.
What do you need to know about the arbitration rules and the arbitral panel?
It is common to designate that particular arbitration rules such as the rules of the American Arbitration Association (AAA) will govern the arbitration. Do the parties want the AAA to administer the arbitration and, accordingly, incur the costs of that administration? If a particular organization is going to administer the arbitration, do the parties want to limit their selection of the arbitrator (or arbitrators) to a list of candidates provided by that organization? How many arbitrators will decide the dispute and, if more than one, is there a chair? What, if any, special responsibilities will the chair have (for example, pre-hearing rulings on discovery issues)? What may seem obvious, but may be missed, is that the agreement should contain some method for selection of the arbitrator(s), either expressly stated in the agreement or implied by the agreement’s adoption of a particular set of arbitration rules.