The Missing Link in Commercial Contracts: Customized Arbitration Procedures

by | Aug 13, 2020 | News

Arbitration agreements are quite common in commercial contracts, largely because of the perception arbitration is a more efficient, cost effective, private, and reliable process than litigation.  To obtain these benefits, parties should agree to specific procedures for their arbitration, rather than relying solely on standard clauses that merely stipulate arbitration will be administered by  an organization, such as the American Arbitration Association (AAA), and will be governed by that organization’s rules.

While the AAA is a competent organization with reasonable rules, parties are more likely to get the arbitration they want – quick, cheap dispute resolution – if they take time to draft an arbitration agreement that stipulates such matters as a deadline for a final award, a reasonable schedule for proceedings, limitations on discovery, and the manner of submission of arguments and evidence.

 

Arbitration Procedure is Largely a Matter of Contract

In Texas, arbitration is governed by the Texas General Arbitration Act (TAA).  See Tex. Civ. Prac. & Rem. Code §§ 171.001, et seq.  Additionally, most written arbitration agreements are subject to the Federal Arbitration Act (FAA).  See 9 U.S.C. §§ 1, et seq.  Both the TAA and the FAA provide for judicial enforcement of arbitration agreements, judicial confirmation of arbitration awards, and, under very limited circumstances, judicial modification or vacatur of arbitration awards.  While neither the FAA nor the TAA stipulate procedures for arbitration, the TAA provides basic rights to parties to an arbitration, including the right to a hearing, the right to notice of the hearing, the right to be heard, the right to present evidence, the right to cross-examine witnesses at the hearing, and the right to be represented by counsel.  The TAA also authorizes (but does not require) depositions and issuance of subpoenas.  See Tex. Civ. Prac. & Rem. Code §§ 171.041-171.055.  Generally, the procedures for arbitration are left to the parties to define as a matter of contract.  See Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84, 95-96 (Tex. 2011).

 

Protecting Contractual Rights from “Basic” Arbitration Clauses

Parties often abdicate their right to define arbitration procedures by agreeing only to a basic form arbitration clause, such as the AAA’s suggested arbitration provision:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

AAA Commercial Arbitration Rules and Mediation Procedures, p. 7; see Commercial Arbitration Rules, R-1.

While this short-form clause is enough to require arbitration, it leaves nearly everything about the process to be determined by the AAA or the arbitrator(s) it appoints.  By agreeing to this type of truncated arbitration clause, a party abdicates its power to define arbitration procedures, such as the right to specify the form of an arbitration demand, to specify the qualifications of the arbitrator(s), to determine the number of arbitrators, to define the procedural rules for the arbitration, to define the scope of discovery and a long list of other factors.

 

Designing a Custom Arbitration Process

An arbitration agreement should create a process that is appropriate for the types of disputes expected to arise out of the underlying contractual relationship between the parties.  The process should balance the parties’ desires to develop and argue their respective cases with the parties’ goals to control costs and obtain timely resolution of their dispute.

For example, a $20,000,000 contract for a communication system may give rise to a complex, high-dollar value dispute with hotly contested issues of fact, numerous witnesses, and complicated expert testimony. The parties to this contract might choose to sacrifice cost savings and timely dispute resolution for a more robust dispute resolution process, with discovery, motion practice, a full-blown final hearing, a final award, and perhaps, a right to appeal the final award to a court.  They also might specify minimum credentials for the arbitrator(s) and, given the likelihood confidential information will be at issue in the dispute, they might stipulate to measures to ensure confidentiality of the proceedings.

On the other hand, a contract for janitorial services for a small office is more likely to give rise to relatively simple disputes with smaller amounts in controversy.  The parties to this contract might choose to sacrifice a great deal of process on the altar of efficiency and cost savings.  For example, they might agree to procedures that forbid discovery and motion practice, that allow only written submissions to be filed with the arbitrator, and that impose an expedited deadline for a final award.

 

Being Intentional is the Key

Parties and their attorneys should be both intentional and creative when it comes to drafting of an arbitration agreement.  Relying on a standard, short-form arbitration agreement will not guarantee a process that will meet your clients’ goals and expectations regarding cost savings, timely dispute resolution, privacy, and expertise of decision makers.  Invest the time up front to create the arbitration process that truly meets your clients’ needs and goals.

James E. (Jim) Davis handles all types of commercial and intellectual property disputes, including patent infringement, trademark infringement, copyright infringement, and trade secret disputes. He has prosecuted and defended virtually every type of commercial claim, including breach of contract, breach of fiduciary duty, corporate and partnership dissolution, fraud, securities fraud, negligent misrepresentation, unfair competition, tortious interference with contractual relations, and business defamation before courts and arbitration panels throughout the United States.

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