Understanding Arbitration Agreements: 13 Key Clauses to Include

While the terms mediation and arbitration are often used together, they are distinctly different forms of conflict resolution. Mediation is a voluntary process; you can leave if you don’t like the way it’s going, or reject the compromise. On the other hand, the process and result of arbitration is almost always legally binding – which means that arbitration agreements must be drawn up very carefully.

Arbitrations have several advantages to litigation, which is the other alternative to dispute resolution. They claim to be less expensive and allow for more flexibility. However, if the arbitration process is not limited, it may be much more expensive than litigation because discovery may be just as wide-ranging and you have to pay the arbitrator(s). Arbitrations may also allow businesses to resolve disputes without causing delays if strict time limits are imposed. Because arbitrations take place outside the court system, they are especially useful in international business transactions to resolve cross-border disputes. Arbitration agreements can be kept private, which means they can provide a specialized forum for resolving intellectual property issues. However, the outcome of the arbitration can be filed publicly in court by either the party seeking to confirm it or a party seeking to vacate it.?

When setting up contracts with arbitration agreements, participants can avoid misunderstandings and ensure that their interests are served by taking the time to craft a robust document that includes several key clauses. Specifying these details about the arbitration ahead of time helps to keep the dispute resolution process focused on solving the issue at hand, not procedural matters.

Here is a breakdown of the clauses you’ll want to include in your next arbitration agreement:

1. While it may seem obvious, it is important to indicate what Language will be used in the arbitration proceedings, so that both parties understand the process and can communicate effectively. For international transactions, specifying the language of the agreement can preempt disputes down the road.
2. The Scope of the arbitration agreement clearly defines the types of disputes or issues that will be subject to the arbitration at hand. The scope of the arbitration may be broad or narrow, but it should specify exactly what is and is not covered in the agreement.
3. The Governing Law of an arbitration agreement defines which laws will apply to the agreement or contract. For example, “This agreement shall be governed by and shall be construed in accordance with the law of the city of New York.”?
4. In some cases it is appropriate also to include a Jurisdiction clause specifying to which jurisdiction any disputes arising from the agreement should be submitted. That is, which court will be called upon to enforce the arbitration award.
5. A Seat of Arbitration clause determines the ‘legal domicile’ of the arbitration and locates the law applicable to the actual proceeding of the arbitration. In addition to state or local laws regarding the process of arbitration, there are many organizations with their own rules as to the conduct of an arbitration.
6. Including a clause to specify the Rules governing the arbitration provides a framework for the process. You can adopt an organization’s rules or customize your own. This includes, for example, choosing whether or not the Rules of Evidence will apply.
7. The parties to an arbitration should also agree on the Number and Procedure for Appointment of Arbitrators.
8. Incorporating a Discovery clause in your arbitration agreements ensures that all parties are aligned on procedural matters. This proactive approach can help avoid complications arising from differing legal interpretations across jurisdictions. The U.S. Supreme Court decision in ZF Automotive U.S., Inc. v. Luxshare, Ltd. has significant implications for arbitration proceedings involving Michigan-based entities. The decision limits the scope of discovery assistance U.S. courts can provide to foreign private arbitration panels. You can also have limits to discovery such as the number and length of depositions.?
9. A clause requiring Confidentiality helps protect sensitive information.?
10. An Enforceability clause reiterates that the parties agree to arbitrate their disputes and that the result, including rewards, can and will be binding.
11. In the event of disputes arising from the arbitration, a Stepped-resolution clause can be designed to require the parties to follow a specific sequence of stages, including negotiation and meditation, before proceeding to arbitration.
12. Time limits are frequently ignored in arbitration and it can stretch on as long, or longer, than a court case. Put a limit on how long before the hearing is held, how long for the hearing, how long the arbitrator has to render the decision, and whether it will be a reasoned decision or not.
13. Finally, it is important that the parties fully understand the cost of the arbitration, and agree on how the payment will be made. A Costs and Fees clause is used to itemize the costs and specify how they are to be distributed, and whether the arbitrator is empowered to award attorney fees and costs.

When disputes arise from an arbitration agreement, ambiguity can cause resolution to become protracted and expensive. This can be avoided if the parties agree on details like scope, framework and authority, and write these parameters carefully into their agreements.?

At August Law, our attorneys can ensure that all parties involved have a clear understanding of their contracts and do everything possible to provide a fair hearing for everyone. We have over three decades of experience helping clients address disputes with alternative dispute resolution strategies, as well as litigation.?

We can help you understand your options and make the best choice for your situation. Contact our team to learn more about our Michigan arbitration services.