Arbitration Clauses: Will They Work for You?
By Albert A. DeNapoli, Esq.
To avoid costly and many times slower proceedings in our
court systems, alternative dispute resolution provisions in contracts
and sometimes as independent agreements have become very popular.
Unfortunately, however, as these provisions have become more popular,
they have become more complicated, many times leading to situations
where their implementation is neither faster than an "old fashion"
court case nor ultimately less costly.
Nevertheless, when used correctly and with attention to
the desired end result clearly in focus, arbitration agreements can
still be an important element of any contractual relationship. To keep
the goal of such agreements in focus, parties to the contract need to
explore and understand the complications that can arise from these
otherwise sometime seemingly benign contract provisions.
Also seemingly benign is the definition found in
Section 2 of the Federal Arbitration Act, which provides written
arbitration agreements "shall be valid, irrevocable and enforceable,
save upon such grounds as exist at law or in equity for the revocation
of any contract." With this simple phrase, the drafters of the statute
do everything but make the interpretation of arbitration agreements
simple; opening the door instead, but understandably, for the panoply
of arguments, and then some, made in contract battles over the years.
Fundamentally, courts view arbitration agreements as a
matter of contract and will not force a party to arbitrate any dispute
which it has not agreed to submit to such resolution. Notwithstanding
the general view of the court to only bind parties to contracts to
which they, in fact, have agreed, the body of law created in the
federal courts adopted by most state courts is to favor arbitration. So
long as the arbitration forum provides for the "fair and adequate
enforcement of a party's statutory rights," courts will generally
uphold a contract's arbitration provisions.
In the first instance, courts must determine whether
the contracting parties had submitted a particular dispute to
arbitration. To determine this question of arbitrability, courts
consider three elements: (1) its policy favoring arbitration agreements;
(2) the exception to this policy based on the "presumed" intent of the
parties; and (3) whether there is in the agreement a clear and
unmistakable expression of actual intent that the parties want this
matter to be decided by arbitration.
Often, however, determining which forum will determine
the initial question of arbitrability is the first battleground between
conflicting parties to an arbitration agreement. Usually, the party
opposing the arbitration will argue that the court is the correct forum
to decide whether the dispute set forth in the contract is or is not
covered by the arbitration provisions, while the party seeking to bring
the dispute to arbitration will argue that it is the arbitrator's
province to make such a determination. Each believing that starting in
its forum of choice will set the stage for the entire dispute
The party opposing the arbitration will often claim
that its statutory rights can not be vindicated in the arbitration
forum. At its simplest level, courts have said that courts will
determine question's of arbitrability that raise the substantive rights
of the parties, while those involving merely procedural questions, may
be decided by an arbitrator. Disputes over arbitrability are, however,
rarely that simple.
Even in situations where substantive rights are at
issue, courts have generally held that where there is a clear conflict
between remedies set forth in the language of the contract and those
found in the language of the federal and/or state statute, the court
will decide the question of arbitrability. On the other hand, where
there is an ambiguity between the language of the contract and that of
the federal and/or state statute, the arbitrator will decide. In
somewhat circuitous reasoning, it is often the court which will
determine whether such a legal ambiguity in the contract exists. Once
the court determines a legal ambiguity, the question of arbitrability
will then be decided by the arbitrator. By way of example, the legal
ambiguity between the contract and the statute in some cases lies in
the use of the word "may" as opposed to "shall" in the provisions which
provide the remedy in question. Accordingly, it is important not only
to draft the provisions of the contract with this in mind, but also to
be cognizant of the applicable federal and/or state statute against
which the provisions of the arbitration clause may trigger a
Many times arbitration is desirous because one
contracting party seeks to have the other party waive certain remedies
by agreeing to arbitration. Again, drafters of such clauses must be
aware that there are certain remedies that cannot be waived due to
considerations of public policy. Furthermore, whether these remedies
are available and if so waivable may differ if the analysis is done
under federal or state law.
In order to protect the validity of arbitration agreements, drafters
will often include a provision called a "savings clause." These clauses
generally maintain that the contract sets forth the exclusive remedies
of the parties, unless applicable law provides otherwise. This
condition is used to "save" the arbitration component of the agreement
although a particular provision may be stricken because it denies a
remedy which can not be waived. Accordingly, one particular and common
form of a "saving clause" is a "severance clause." Such clauses seek
to "sever" any of the contract or arbitration provisions which are in
violation of the law or public policy while "saving" the remaining
language. Again, while courts may use these severance clauses to "save"
the arbitration language, drafters of such contract provisions must be
cognizant that certain remedies they have sought to exclude from
arbitration may be reinstated in order to save the arbitration. By way
of example, a savings clause may allow the recovery of attorney's fees
and costs, where an arbitration provision which denied such a remedy
would have otherwise been stricken.
Along the same lines, drafters of arbitration
agreements must also be careful that they have not inadvertently
provided contract language which will have a retroactive effect and
revitalize claims which would have otherwise been time barred.
While arbitration is still in many cases a reasonable
alternative to "courthouse" litigation legal challenges through the
years have complicated the simplicity behind the idea of a forum where
the parties can agree to resolve their disputes under their own terms,
more quickly, efficiently and economically. Often arbitration
agreements are drafted by transaction attorneys who, while very
competent, have never seen the practical effects on litigation of the
various aspects of their agreements. Involving litigation attorneys to
review and assist in the drafting of the arbitration language can help
to protect the desired result of the contract. Flow charts which
detail the goals of the arbitration agreement can be used effectively
in drafting these provisions. Keeping the end result in mind, the
drafter must chart out the effect the applicable laws of the controlling
jurisdictions (and possibly the rules of the chosen arbitration forum
if one is so chosen) will have on the efforts to reach that goal and
then craft the language to specifically address these issues. By
understanding the varied complications affecting these agreements and
drafting in such a manner as to reduce their ability to defeat the
intent of the parties, arbitration agreements can, however, maintain
their viability as an important strategic tool.
Originally published by HotelExecutive.com in January 2007.