Recent Court Decisions Highlight the Importance of Customizing Ar

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Recent Court Decisions Highlight the Importance of Customizing Arbitration Agreements

by: Litigation Department of Barnes & Thornburg LLP - Commercial Litigation Update

Tuesday, December 3, 2013

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As decreasing budgets for public courts make speedy determinations difficult to obtain and public courts are less willing to keep proceedings in their courts confidential, parties are increasingly using arbitration as an alternative dispute forum. The United States Supreme Court continued its legacy of enforcing arbitration agreements and upholding arbitrators’ exercise of contractually-granted authority in two different cases during its 2013 term.

In American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013), the Court enforced an arbitration agreement which expressly prohibited class arbitration even though separate and individual arbitrations would be cost-prohibitive. The Court specifically rejected the argument that it should invalidate the arbitration agreement because an individual party’s cost to arbitrate exceeded his or her potential recovery.

In Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064 (2013), the court held that the parties were bound by an arbitrator’s interpretation of their arbitration agreement because the parties agreed the arbitrator would construe the agreement. There, the arbitrator had decided that class arbitration was permitted even though the arbitration agreement did not specifically address the issue of class arbitration. The Supreme Court reasoned that the parties were bound by the arbitrator’s interpretation “however good, bad, or ugly” because the parties had agreed to be bound by the arbitrator’s decision.

The takeaway from these cases is that: (1) courts will generally enforce arbitration agreements as written; and (2) under the Federal Arbitration Act, there are few grounds on which a court may vacate an arbitrator’s award. A party should not assume that a court can or will vacate an arbitrator’s award on appeal. In light of these realities, businesses should consider their options to control the arbitration process by tailoring arbitration agreements to limit potential outcomes and costs.

Some of the terms a party should consider in drafting an arbitration agreement include the following:

Venue Clause. Identify the location of the arbitration hearing. Unlike litigation in courts, an arbitration venue provision does not need to have a connection to the residence of the parties or the occurrence of the facts underlying the dispute. In choosing a venue, parties should consider (1) the convenience of the location – the availability of witnesses, documents, and other evidence; (2) the available pool of qualified arbitrators within a geographical area; and (3) the cost of holding an arbitration in a particular city. Parties often agree on New York or London without considering the increased expense in holding arbitration in a large city. The cost of attorneys, arbitrators, hearing rooms, hotels, food, and transportation can be significantly higher in some cities. If arbitration lasts for a number of days, weeks or months, the costs quickly can become significant. To reduce these costs, parties might consider choosing venues in smaller cities where arbitration costs generally are less.
Choice of Law. Select the state law that will govern any dispute. Businesses may want to consider choosing a state’s substantive law that has been traditionally favorable to business like Delaware law. Additionally, parties may designate whether the Federal Arbitration Act and/or a particular state arbitration act applies. Some state arbitration laws permit greater scrutiny of arbitrator’s decision through enhanced appeal processes. Parties should also consider including a provision identifying the procedures that will govern the arbitration process. While arbitration could be cheaper than litigation in the courts, if the parties end up spending resources on disputes about procedures, those cost savings could be lost. Parties may specify that the arbitration will be governed by a particular set of arbitration procedural rules or selected parts of the Federal Rules of Civil Procedure or develop their own rules for arbitration. Regardless of the parties’ choice of law, arbitrators generally are not permitted to issue out-of-state subpoenas to third parties.
Class Arbitration. Determine whether class arbitration will be permitted. After the Supreme Court’s ruling in the Oxford Health case, parties should specify whether they agree to class arbitration.
Choice of Arbitration Body. Select an administrative body to manage the arbitration process. The parties to an arbitration agreement may want to designate an arbitration body in the agreement to administer the dispute-resolution process. Three commonly used arbitration bodies for disputes between parties in the United States are the American Arbitration Association (AAA), Judicial Arbitration and Mediations Services, Inc. (JAMS), and Conflict Prevention and Resolution (CPR). Some commonly used arbitration bodies for international disputes are the International Chamber of Commerce (ICC) International Court of Arbitration, the AAA, and the London Court of International Arbitration (LCIA).
Conditions Precedent to Arbitration. Determine whether arbitration should be prohibited until a party has satisfied certain conditions. Parties can agree that satisfaction of specified conditions is required before a dispute is considered ripe for arbitration. Such conditions precedent might include mandatory mediation, written notification of claims within a fixed period or exhaustion of other contractually-established procedures.
Consolidation/Joinder. Evaluate the potential for multi-party disputes. When a dispute arises from one transaction and involves multiple parties, consolidating all of the disputes into one overarching forum for resolution may be beneficial. Some industries maintain standards that provide for consolidation or joinder of additional parties to a dispute. Otherwise, parties are free to consolidate two or more separate arbitrations into a single proceeding or to permit the joinder of a third party into the arbitration. This decision could minimize duplicative presentations of claims and the possibility of conflicting rulings from different arbitrators. Conversely, the decision to consolidate claims could be a source of delay or increased expense. All parties to be consolidated or joined in such proceedings, however, either must have previously agreed to arbitration or agree to the arbitration process for resolution of the dispute.
Discovery. Determine scope of permissible discovery. Before the parties present their evidence to the arbitrator, they may exchange information such as documents and perhaps take/provide testimony through depositions and/or through written questions. Discovery can be time consuming and costly. Controlling both the amount and scope of discovery through appropriate provisions in the arbitration agreement should help to control discovery costs. Useful provisions might include limiting the time period for discovery or the number of depositions or excluding depositions as a form of discovery.
Duration of Arbitration Proceeding. Consider the time period for the arbitration process. Parties should consider including a provision in the arbitration agreement specifying the time period within which the arbitration would occur after the demand for arbitration has been served. By agreeing to proceed with the arbitration within so many months of the notice of intention to arbitrate, the parties may limit costly delays.
Awards/Remedies. Define the arbitrator’s authority to issue relief to the parties. Courts have held that an arbitrator may grant any remedy or relief that he or she deems just and equitable within the scope of the parties’ agreement. To allay the fear of excessive awards, parties should include a clause limiting the scope or type of any permissible remedy. Alternatively, parties could include or exclude specific awards or remedies either in the contract or can stipulate to such limitations during the arbitration process.
Assessment of Attorneys’ Fees and Costs. Address the issue of whether attorney fees and costs are to be considered as part of the potential relief. Options include: (1) each party bears its own costs and fees, (2) the arbitrator is given the discretion to award fees and costs, or (3) fees and costs are to be awarded to the prevailing party.
Appeal of Arbitration Awards. Determine whether the arbitrator’s award is to be final and binding on the parties. The grounds for vacating an arbitration award under the Federal Arbitration Act are generally limited to egregious circumstances. Such circumstances include: (1) where an arbitrator engaged in corruption, fraud or misconduct; (2) the arbitrator ruled on an issue that was not before him or her; or (3) the arbitrator made an obvious factual mistake. Parties, however, may want to agree to an appeal to a separate arbitrator panel. If so, the parties should include a period for resolution, an outline of the issues subject to review (for example, material errors of law and/or failure to apply the law), and a framework for the appeals process. The American Arbitration Association recently promulgated new “optional appellate arbitration rules” which give parties a standardized and streamlined procedure for pursuing an arbitration appeal. The AAA’s appellate panel employs a more expansive standard of review than the existing federal and state statutes and relies on former federal and state judges and neutral arbiters who have strong appellate backgrounds. Under the new AAA appellate rules, a party has 30 days from the date the arbitrator issues a ruling to initiate an appeal.