Agreements to arbitrate Featured

7:00pm EDT February 23, 2010

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.

What other issues should be considered?

The contract should, of course, specify what law applies and with it the location for the arbitration proceedings. Another issue to consider is whether a court or the arbitral panel will decide questions of preliminary injunctive relief. If the contract contains an agreement to arbitrate, but lacks express language authorizing a party to seek preliminary injunctive relief from a court, then a party may find itself having to wait for the constitution of arbitration proceedings before having the means to gain immediate relief. In this respect, arbitration may actually create delay.

How does discovery work in arbitration?

Because the agreement is usually entered into at a time when the parties do not know the substance of their dispute (and would presumably hope that no dispute ever occurs), the parties are ignorant of the particulars that might make broad discovery rights more beneficial to one side over another. Of course, the broader the discovery, the more expensive and time-consuming the process becomes. Leaving discovery issues to the discretion of the arbitrators is one solution. Coupling that discretion to the amount in controversy and time limits for completion is another. Thus, parties may agree in advance that only a limited number of depositions will be permitted, unless the value of the claim exceeds a certain amount, in which case the arbitrators may permit additional depositions, and, in any event, discovery must be completed within a certain set time period after the arbitration panel is constituted.

How is international arbitration handled?

If the contract is between parties of different countries, then there are other issues to consider. The parties may agree to select established institutionalized rules of procedure of the ICC, UNCITRAL and ICSID to bring some structure and certainty to the process. International arbitration often presents a vastly different method for the gathering of proof and the subsequent presentation of evidence. These differences reflect distinctions between the common law and civil law traditions, coupled with primary purposes for arbitration including less costly and speedier resolutions to disputes. For instance, the presentation of evidence before arbitral tribunals is often made through affidavits submitted by the parties. Accordingly, it is often the case that the arbitration hearing will provide the first (and only) occasion a party will have to examine adverse witnesses, giving rise to the need for broad document production in advance of the hearing and, conversely, extreme care in witness preparation.

H. Eugene Lindsey III is a member of the litigation department at Katz Barron Squitero Faust. Reach him at hel@katzbarron.com.