When negotiating a contract, in deciding whether to include a mandatory arbitration provision, the parties and their lawyers should consider, among other things, the following issues:
- Are the disputes that are likely to arise under this contract ones that would benefit from being decided by an individual with specialized knowledge or training in the subject matter of the dispute or the legal framework under which it arises? If so, it may be advisable to include a requirement in the arbitration provision ensuring that the appointed arbitrator has the necessary qualifications. The agreement should clearly set out the protocol for selection of an arbitrator or arbitration panel. Consideration should be given to identifying a short list of mutually acceptable arbitrators and including that in an addendum to the contract.
- Should arbitration be mandatory for all manner of disputes that may arise under or in connection with the contract, or be restricted to only certain kinds of disagreements? For example, parties may wish to provide for mandatory arbitration of post-closing adjustments in a business acquisition agreement, but not impose arbitration on other disputes that may arise under the contract. Similarly, in a shareholders’ agreement, it may be desirable to reserve share valuation disputes to arbitration, but leave it to the parties to decide how they wish to adjudicate other disputes after they have arisen.
- Are the disputes that arise under the contract of a nature that a final and binding decision by an arbitrator or arbitration panel will take precedence over benefits of a right of appeal by the unsuccessful party? If some right of appeal is determined to be desirable, the right to and scope of such appeals should be explicitly set out in the agreement. Where appeals are contemplated, the agreement should be explicit regarding whether they are only on points of law, on questions of mixed fact and law, or on questions of fact. In some cases, the parties may determine that appeals will only be available when the arbitral award exceeds some prescribed monetary value. Finally, consideration should be given to whether the appeal is to the courts or to a private arbitral tribunal.
- Are the disputes that may arise under the contract likely to be those that will involve only the contracting parties? If not, consideration should be given to including provisions in the agreements with other potentially necessary parties compelling them to participate in an arbitration between the principal contracting parties. In reality, however, this is often difficult to achieve. So, where it is likely that other parties will need to be joined in the process, a mandatory arbitration provision may not be the best choice.
- How important to the parties is an expeditious and cost-effective resolution of any dispute that may arise under the contract? If this is an important factor, consideration should be given to either building in a procedural protocol or adopting the rules of an arbitral institution that minimizes unnecessary procedural steps and pre-hearing discovery processes. If the types of disputes that may arise are likely to require urgent disposition, some institutional rules provide for interim relief and expedited procedures.
- Is there is a significant likelihood that injunctive relief or a vesting order may be required, especially if it is to affect the rights of non-contracting parties? Then arbitration is probably not the best option. Arbitrators do not have the same ability to enforce such remedies as do the courts.
- How important to the parties is the privacy and confidentiality of the proceedings and the materials filed in connection with it? If these are important considerations, explicit provisions should be incorporated into the arbitration agreement. If appeal rights are to be included, consideration should be given to preserving confidentiality by utilizing an arbitral appellate tribunal, rather than having recourse to the courts.
- Will it be important to one or both parties to have a determination that will provide binding legal precedent in other disputes? If so, then arbitration is not likely the best choice, since awards are private and not generally admissible or binding on any other court or arbitrator.
- Although beyond the scope of this article, mandatory arbitration clauses may foreclose class actions, especially in non-consumer commercial contracts.
- If an arbitration clause is included, should it mandate the use of a specific arbitral institution to facilitate arbitrator selection and procedural rules? If so, commercial lawyers should familiarize themselves with the features of different arbitral institutions, including matters such as fees charged, procedural protocols, appointment processes, the availability of interim and emergency measures, and confidentiality provisions.
For more information, check out the article: To Arbitrate or Not to Arbitrate? That's a Good Question!