The Colorado Lawyer
Vol. 43, No. 8 [Page 59]
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Alternative Dispute Resolution
by James L. Stone
Alternative Dispute Resolution articles are sponsored by the CBA Alternative Dispute Resolution Section. They describe recent developments in the evolving field of ADR, with a particular focus on issues affecting Colorado attorneys and ADR providers.
Marshall A. Snider, Denver—(303) 885-6659, firstname.lastname@example.org
About the Author
Jim Stone is an ADR professional. He practices arbitration on the American Arbitration Association Commercial Arbitration panel. He practices mediation with ADR Source. He also teaches ADR as an Adjunct Professor at the University of Denver Sturm College of Law—email@example.com.
Properly drafted arbitration clauses allow arbitrations to proceed more efficiently and expeditiously than civil litigation. Poorly drafted arbitration clauses may cause the parties’ process to become inefficient and expensive. This article identifies appropriate terms to be included in an agreement to arbitrate, which should allow for an efficient and expeditious process.
This article gives guidance to lawyers drafting and litigating domestic commercial disputes under an agreement to arbitrate. The suggested arbitration clauses discussed below can be used as appropriate, based on the needs of the clients.1
An appropriately constructed arbitration clause will assist in avoiding many of the adverse effects that might arise during litigation of an arbitration. Planning and creating the clause before a dispute arises is much easier and effective than doing so when the parties are at odds and do not trust each other.
The transactional lawyer is advised by a client that he wants to arbitrate disputes that may arise in the agreement. He wants a process that is more efficient and less expensive than a civil suit. The attorney and client discuss the benefits and limitations of arbitration. He asks the attorney to include an arbitration clause in the transactional document. Initially, the attorney has to look into the future and speculate as to what pre-dispute terms might give her client the best advantage in an arbitration. For example: Will the client need to conduct discovery? Does the client desire to limit liability? These and other issues need to be considered.
Arbitration agreements come in all sizes, from simple one-sentence agreements to a multi-page, all-encompassing agreement. A dozen or so topics could be included in an arbitration clause to achieve the goals of enforceability, efficiency, and effectiveness. Some of these topics will be addressed after a short discussion of the foundation for an agreement to arbitrate.
Arbitration is a "creature of contract." As such, the parties are free to design the terms they wish to include in their agreement. These terms will control the arbitration process and provide a structure for judicial enforcement and facilitation of the agreement to arbitrate.
The U.S. Supreme Court has on many occasions expressed that arbitration is "a creature of contract." Recently, the Court stated: "Arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit."2
With rare exception, the only obligation one has to arbitrate the resolution of a dispute is by agreement. In the absence of an agreement to arbitrate, a party is not bound to forgo his or her right to a civil trial. The terms of the agreement to arbitrate define the parties’ rights, duties, and obligations concerning the arbitration process in their particular dispute.
Scope of the Dispute
The agreement to arbitrate should identify the disputes that are subject to arbitration. Typically, the agreement to arbitrate will be embedded in a contract concerning a particular transaction (referred to in this article as the transactional contract). An arbitration clause will frequently provide that any disputes concerning the interpretation, validity, and enforcement of the transactional contract are subject to arbitration. The clause may be broader in scope than disputes arising under the transactional contract and the arbitration clause could cover any disputes of any nature between the parties to the transactional contract. A sample scope clause follows:
Any dispute, claim, or controversy arising out of or relating to this Agreement or the breach, termination, interpretation, or validity thereof, shall be determined by arbitration before [name of institution, etc.].
Binding or Advisory
The parties should decide whether they want the arbitrator’s decision to be advisory or binding. Binding agreements to arbitrate are adjucatory in nature and nonbinding agreements are non-adjudicatory, similar to a dispute resolution process known as "early neutral evaluation." Arbitration agreements should call for binding arbitral decisions. If the parties prefer early neutral evaluation, the transactional document should identify that as the process the parties desire.
Negotiation or Mediation—
Condition Precedent to Arbitration
Mediation is essentially "facilitated negotiation." Mediation is a highly effective dispute resolution process that allows disputes to be settled without resorting to an adjudicatory process. Frequently, more sophisticated dispute resolution clauses will include a clause that requires negotiation and/or mediation in advance of arbitration.3
These processes are a much more cost-effective and efficient means of resolving a dispute. If these processes are included in a dispute resolution clause, strict deadlines should be included to prevent one party from delaying the adjudicatory process.
To highlight the importance of mediation as a condition precedent to arbitration, the American Arbitration Association (AAA) recently amended its Commercial Arbitration Rules and Mediation Procedures (including Procedures for Large Commercial Cases) to contain a provision that, in all cases where the dispute is in excess of $75,000, the parties are required to mediate their dispute before or concurrently with the arbitration.
Typically, the transactional contract will provide that the substantive law for the enforcement of contracts generally applies to issues of contract interpretation and enforcement. Best practices suggest that the parties should identify the law applicable to the arbitration clause itself, because it may not be the same law that applies to the interpretation or enforcement of the transactional contract in which the arbitration clause is embedded. For example, if the contract is one involving a transaction in interstate commerce, the Federal Arbitration Act (Federal Act)4 may apply to the arbitration clause.
In Colorado, the legislature has adopted the Revised Uniform Arbitration Act (Revised Act).5 It modernizes arbitration law and provides a variety of improvements that do not exist under the Federal Act and did not exist under the previous state arbitration act.6
In Volt Information Sciences v. Board of Trustees of the Leland Standford Junior University,7 the U.S. Supreme Court held that the Federal Act did not preempt the California Arbitration Act where the parties involved in an interstate dispute agreed that the California Act would be the applicable law. In light of Volt, the parties are free to select any governing law for the arbitration, as long as it does not directly conflict with the Federal Act. Consequently, the parties are free to select the Revised Act as the applicable arbitration law.
Adopting the Revised Act as the applicable or governing law for the arbitration clause will eliminate the need for many other provisions in the agreement to arbitrate. For example, the Revised Act has provisions for arbitrator disclosures, arbitrability, discovery, dispositive motions, consolidation, provisional remedies, and other topics. If a party wants to expand or limit one or more of these provisions, the arbitration clause should so specify. The Revised Act, however, provides that certain provisions are not waivable.8
"Arbitrability," as the is term used in its most simple form, is similar to jurisdiction. Arbitrability questions may concern who and what is subject to arbitration: who are the proper parties and what actual dispute, if any, is subject to arbitration. These threshold questions of (1) whether there was an agreement to arbitrate and (2) what topics the agreement covers are termed "arbitrability issues." The ultimate question for the parties is whether they want a court or an arbitrator to decide these issues. The parties should identify who they want to decide arbitrability issues in the "scope of dispute" section of the agreement.
Pursuant to the Revised Act, the court shall decide whether an agreement to arbitrate exists or whether a particular controversy is subject to an agreement to arbitrate.9 An arbitrator shall decide whether a condition precedent to arbitrability has been fulfilled and whether a contract containing a valid agreement to arbitrate is enforceable.10
If the arbitration is subject to the Federal Act, a substantial body of federal law exists on the topic of arbitrability.11 If an institution is selected to administer the arbitration, its rules may identify jurisdictional issues to be decided by the arbitrator.
Rule 7 of the AAA’s Commercial Rules provides that the arbitrator shall decide his or her own jurisdiction. Other arbitration organization rules are similar. Courts that have examined these provisions have, for the most part, concluded that when the agreement to arbitrate identifies certain applicable institutional rules, such as AAA Rule 7, the parties have demonstrated "clear and unmistakable evidence" that the parties selected the arbitrator to decide issues of arbitrability.12
Arbitrations can be administered by institutions or on an ad hoc basis. Agreements can set forth the number of arbitrators, how the arbitrators are selected, and the necessary qualifications for arbitrators.
Applicable Institution or Ad Hoc
A number of institutions administer arbitrations. These institutions usually have rules applicable to the process and administer the process by using a case manager. On the other hand, some arbitrations are conducted on an ad hoc basis. In these cases, an institution is not involved and administration is usually left to the arbitrator or an assistant.
Generally, the benefits of an institution administering the process outweigh the cost savings, if any, of an ad hoc arbitration. Some disputes, however, do not need the process administered by an institution.
Number of Arbitrators
Most arbitrations are before one arbitrator or three arbitrators. A single arbitrator is usually less expensive than a panel of three and scheduling is less difficult. A panel of three, however, most likely ensures that an extreme decision is avoided. Three arbitrators are able to temper the decision, where one arbitrator may provide a more extreme result.
The agreement may provide for a process that allows each side to appoint an arbitrator, known as a "party-appointed arbitrator." The two party-appointed arbitrators select a third arbitrator who is neutral.
Method of Selection
Typically, if an institution is administering the arbitration, the organization will provide a panel of qualified arbitrators and the parties can select an arbitrator from the panel. If the parties are unable to agree on an arbitrator, institutions often provide a strike list.
Ad hoc arbitrations often require the parties to reach an agreement as to selection of the arbitrator at the time of creating the agreement to arbitrate. If the parties are unable to agree, they would provide an independent third person or entity to select the arbitrator or create a selection process.
One of the benefits of arbitration is that the parties can identify the qualifications of the decision maker. For example, in certain fields that require technical expertise, the agreement may call for an arbitrator with a number of years of experience in the technical field. The parties may require the arbitrator to be a retired judge or an attorney with a certain number of years of experience. The arbitrator is not required to be an attorney.
The parties are free to authorize as much or as little discovery as they prefer. It is helpful to identify the type and extent of discovery in advance, so that the process is not sidetracked by resolving scope-of-discovery disputes.
The agreement should identify the type of award the parties desire. Typically awards are "standard" or "reasoned" awards. Reasoned awards allow the parties to understand why they prevailed or failed to prevail. Standard awards simply identify, without reasoning, the relief awarded, if any. If an institution is selected, its rules will often identify the type of award to be issued and the time when it must be issued.
The parties should decide the powers to be granted to the arbitrator. The arbitrator may or may not be empowered to grant sanctions, decide dispositive motions, award punitive damages, and award arbitration fees and attorney fees and costs. By deciding these powers in advance, the parties will be aware of the potential risks and benefits of proceeding. Punitive damages provide an interesting interplay between the Federal Act and the Revised Act. Arguably, under the Revised Act, the arbitrator may not be empowered to award punitive damages in certain cases, but under the Federal Act, the arbitrator is not restricted from awarding punitive damages.
Limitation of Liability
The agreement may specify that the arbitrator is not empowered to award certain types of damages, such as incidental, indirect, or consequential damages. The clause may also provide that the arbitrator is not empowered to award lost profits or punitive damages.
In Green Tree Financial v. Bazzle,13 the U.S. Supreme Court held that when an arbitration clause is silent on the issue of class actions, an arbitrator rather than a court has the power to determine whether the arbitration clause authorizes a class action. If the contracting parties do not want to encumber the process by allowing class actions, they should provide that no class actions may proceed in the arbitration.
Expanded or Limited Judicial Review
The law is currently somewhat unsettled as to whether the parties may expand or limit judicial review of an arbitration award. Both the Federal Act and the Revised Act limit the grounds on which an arbitration award may be set aside by a court. Essentially, the question boils down to whether the parties may by contract avoid the statutory grounds allowing for vacatur of arbitration awards and create more expansive grounds for vacatur, or whether the parties may limit the ability of the non-prevailing party to seek vacatur of the award. In Hall Street Associates v. Mattel,14 the parties attempted to expand the court’s statutory role by including the following in their agreement to arbitrate:
The Court shall vacate, modify or correct any award: (i) where the arbitrator’s findings of fact are not supported by substantial evidence or (ii) where the arbitrator’s conclusions of law are erroneous.15
Ultimately, the Court held that the parties could not expand judicial review, because the Federal Act’s grounds for vacatur are exclusive.
Whether the parties may limit or restrict judicial review of arbitration awards may require a similar analysis. In the Kyocera line of cases,16 the Ninth Circuit Court of Appeals indicated in dicta that the parties might be able to limit judicial review by contract. Any analysis should also explore whether such a limitation would cause the agreement to be unconscionable. Any party intending to expand or limit judicial review of arbitration awards should conduct an extensive practical and legal analysis and then proceed with caution.
Because arbitration is a creature of contract, practitioners have at their disposal a variety of options to provide clients the most efficient and inexpensive avenue to resolve their disputes. A well-drafted arbitration clause will help to avoid many adverse effects that can arise in an arbitration proceeding.
1. The arbitration clauses discussed in this article were initially prepared by the arbitration clause subcommittee of the CBA ADR Section. The subcommittee considered a variety of clauses, from multi-page clauses to one- or two-sentence clauses, and was of the opinion that the clauses set forth in this article were adequate to cover most domestic commercial arbitrations. International, securities, construction, employment, and other specialized areas may require different treatment.
2. BG Group PLC v. Argentina, U.S. , 134 S.Ct. 1198, 1206 (March 5, 2014).
3. The more expansive term "dispute resolution clauses" is used instead of "arbitration clauses," because a dispute resolution clause may contain use of other ADR processes, such as negotiation and/or mediation.
4. 9 USC §§ 1 to 16.
5. CRS §§ 13-22-201 et seq.
6. See Carr et al., "Colorado’s Revised Uniform Arbitration Act," 33 The Colorado Lawyer 11 (Sept. 2004) (summary of the revised Act).
7. Volt Information Sciences v. Bd. of Trustees of the Leland Standford Junior Univ., 489 U.S. 468 (1989).
8. CRS § 13-22-204.
9. CRS § 13-22-206(2).
10. CRS § 13-22-206(3).
11. See, e.g., Federal Arbitration Act, 9 USC §§ 1 to 16; Buckeye Check Cashing v. Cardengna, 546 U.S. 440 (2006); Howsam v. Dean Witter Reynolds, 537 U.S. 79 (2002); First Options of Chicago v. Kaplan, 514 U.S. 938 (1995); Prima Paint v. Flood & Conklin Mfg., 388 U.S. 395 (1967).
12. Kaplan, 514 U.S. at 944. Some circuit court opinions holding that the arbitrator shall decide arbitrability issues include the following: Petrofac v. DynMcDermett Petroleum Operations, 687 F.3d 671 (5th Cir. 2012); Fallo v. High Tech Institute, 559 F.3d 874, 878 (8th Cir. 2009); QualCom v. Nokia, 466 F.3d 1366, 1372-73 (Fed. Cir. 2006); Paine Webber v. Bybyk, 81 F.3d 1193, 1202 (2d Cir. 1996).
13. Green Tree Financial v. Bazzle, 539 U.S. 444 (2003).
14. Hall Street Associates v. Mattel, 552 U.S. 576 (2008).
15. Id. at 579 (emphasis supplied).
16. LaPine Tech. v. Kyocera, 130 F.3d 884 (9th Cir. 1997); Kyocera v. Prudential-Bache Trade Servs., 299 F.3d 769 (9th Cir. 2002); Kyocera v. Prudential-Bache Trade Servs., 341 F.3d 987 (9th Cir. 2003).
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