Effective Use of Arbitration Clauses

Clients often want dispute resolution provisions to include only jurisdiction, venue, and choice of law terms to avoid overwhelming their clients.  In these circumstances, I always recommend one additional term: mandatory non-binding mediation before a claim or lawsuit is filed.  When the stakes are very high, I often recommend clients to include details that do not seem so important during negotiations but would have a great effect in a future arbitration.

This blog post addresses use of these two types of terms:

I.  Tiered Dispute Resolution Clauses.  By requiring the parties resolve their disputes before proceeding to arbitration or litigation, the parties can engage in informal or formal discussions to resolve their differences.  A cooling off period during which the parties (a) assess the total business case for pursuing or avoiding litigation and (b) start worrying internal and external costs of litigating spurs the parties to become more flexible in settlement negotiations.  Because when the moment of truth arrives, the business people ultimately decide what to do.  

This reality is why I prefer using clauses where the business people–without any attorneys–are required to meet to work out their dispute.  In many cases, it is the first time the owners or officers from each party are meeting.  The attorney’s responsibility at this point is simple: remind your client this is an opportunity for the parties to work out a simple or creative business solution the attorneys are not equipped to contemplate, let alone negotiate.. 

Tip: Limit this first phase to a thirty day period to avoid abuse of this requirement to delay the dispute resolution process.  

II. Arbitration Schedule Clauses.  The parties can agree the arbitrator must issue a ruling within a fixed period of time.  I prefer a one-year time period as the default position.  One year gives the parties enough time to develop and to investigate their cases but not enough time for stall tactics.  Many factors will dictate whether you should advocate for a longer or shorter time period.

Another tactic is requiring the parties agree to set the entire arbitration schedule at their first procedural conference with the arbitrator.  Use of this tactic is typically reserved for parties who will benefit from a more condensed proceeding.  Factors to consider include which employees will probably be involved and the estimated time commitment, your ability and the contracting party’s ability to absorb significant legal and other financial costs within a shorter time frame, and the likelihood of whether your internal legal counsel played a business role (versus a legal role) in the transaction.   

Tip: Spending a small amount on legal fees upfront can create enormous benefits in the future.

Scope of arbitration, number of arbitrators, and waiver of statutory remedies are other arrows in the arbitration clause quiver.  Just make sure you hire the right archer.


David Seidman is the principal and founder of Seidman Law Group, LLC.  He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, real estate, and other issues.  He can be reached at david@seidmanlawgroup.com or 312-399-7390.

This blog post is not legal advice.  Please consult an experienced attorney to assist with your legal issues. 



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