ABA Section of Business Law
Business Law Today
March/April 1999
One clause doesn’t fit all
Designing ADR to meet your client’s needs
By TERRY L. TRANTINA
Trantina is a member of Ravin, Sarasohn, Cook, Baumgarten, Fisch and Rosen in Roseland, N.J.
Do your clients relish the idea of going to court? No? could it be because it’s wasteful of their time and money? After all, it’s very unbusinesslike. It allows strangers to rummage through every file drawer. It’s layered with time-consuming processes and unfathomable and repeated delays. The outcome is unpredictable and dependent on decisions by people that are not familiar with your clients’ particular business issues. Perhaps the most irritating aspect of the process is that they give up control and must rely on others — their own lawyer, the opposing party’s lawyer, court clerks and judges — to move the process forward. Things spin out of control and chew up their resources in unforeseeable ways.
Is there a way to avoid this process? Offer them alternative dispute resolution. That offer will initially add one more irritating unknown to the barriers to the resolution of their business problem. However, it is a viable solution that you should encourage them to consider. But first you must understand where ADR law is today. Offering clients the standard ADR clause or the dispute resolution process that may come from that boilerplate clause can permanently sour them on ADR when they experience just as many or worse problems as they did in the courts. In fact, they may be subjected to the worst of both worlds and end up spending an ordinate amount of time both in court and in ADR and ultimately achieve the same dissatisfying and expensive outcome.
ADR law is not rocket science. It is very straightforward. The Federal Arbitration Act (FAA), 9 U.S.C. §§1-16, is applicable to all commercial relationships "involving interstate commerce," and allows the drafter of a pre-dispute commercial contract to dictate every aspect of the dispute resolution process. Furthermore, it requires every state and federal court to enforce each aspect of that process, as long as it is fundamentally fair.
Fundamental fairness is not defined in the same terms as the courts would require for their own system. For example, guarantees of a jury or an appeal or remedies for mistakes of law are not required. Fundamental fairness simply requires that you not give advantage to one party or deprive a party of a timely merit-based inquiry and that the dispute be resolved before a neutral third party.
How do you satisfy your client?
First, take enough time to understand their business needs; the nature of likely or unlikely, but significant, disputes; what they dislike most about resolving disputes in court; and what, in affirmative terms, will be required to produce a satisfying process that yields a merit-based and timely outcome.
Second, become familiar with the state and federal case law that has identified flaws in other ADR clauses. The basic FAA principle is that ADR provisions are to be given effect and enforced precisely as the parties expressly provide in their agreement. A number of decisions find the court lamenting that "if the clause had only expressly provided for it, this court would have had no choice but to enforce it," but because the ADR clause was vague or silent on the issue, it could not.
Third, don’t copy another lawyer’s ADR clause that they have custom designed for another client. That may be actually worse than using a standard boilerplate clause.
Fourth, use an up to date issues checklist when drafting ADR clauses. Each time you run across another court decision that addresses a flaw in someone else’s ADR clause, modify your checklist.
The following is my checklist. However, just as you should not to blindly copy another lawyer’s ADR clause, before you use this checklist, understand it and then make it your own. Check it against existing case law. Read the principal cases. Get a feel for the basic concepts that drive the courts. Then put the checklist in your own words; use your own format. This checklist is simply a starting point, not for drafting an ADR clause, but for drafting your own checklist.
My checklist assumes that you incorporate ADR rules of one of the principal ADR providers, such as the Commercial Arbitration Rules of the American Arbitration Association (AAA) or those of the CPR Institute for Dispute Resolution (CPR). Each of these entities has a set of basic procedural rules that can provide a procedural base from which to begin drafting a suitable ADR provision. The AAA has significantly revised, updated and improved their Commercial Rules for Dispute Resolution. Most of the changes and additions were made to its arbitration rules. The new AAA rules became effective Jan.1, 1999, for demands made on or after that date, unless the terms of your ADR agreement expressly state otherwise.
Also bear in mind that each ADR entity’s set of procedural rules is different in some important respects and includes provisions that reflect that entity’s particular ADR or managerial philosophies. For example, the manner in which a subpoena for witnesses or documents is issued differs significantly between the rules of the AAA and CPR. The AAA’s new rules require a "reasoned award" only if the request is made by "the parties" before appointment of the arbitrator, but still include a rule stating that a party’s attempt to pursue its claims in court rather than through arbitration shall not constitute a waiver of arbitration.
Therefore, it is critical that you become very familiar with the specific provisions of the ADR entity’s set of rules before incorporating them by reference. This is particularly important as the rules of the ADR entities, like those of the AAA, become more sophisticated and complex. Your ADR provision can then provide that, where your ADR clause adds to or differs from the ADR entities’ rules, your ADR clause will govern.
Both the AAA and CPR have also recently issued their own checklists to aid in customizing their standard clauses. Their ADR rules and checklists can be found on their respective Internet Web sites at http://www.adr.org (AAA), and http://www.cpradr.org (CPR).
Finally, you should note that in some instances my checklist may prefer a specific approach to an issue based on my own experiences. For example, I strongly prefer to place the arbitrator in control of discovery and prohibit party-issued subpoenas for documents. You may have different preferences and should develop your own checklist. And always, always, remember the proverb that "when there appear to be only two choices, the third one is probably the best." Be creative, but be fair.
An ADR checklist
Specify the type and combinations of ADR desired Select number and type of ADR steps- Mediation only
- Arbitration only
- Negotiation and arbitration
- Mediation and arbitration
- Negotiation, mediation and arbitration
Good faith, face-to-face negotiation
- Between same players
- Escalate above players with stake in outcome to “big picture” executive (recommended approach)
- Require authority to bind (minimum is reachable decision maker)
- This step slows process down (Is time an issue?)
Mediation by neutral third party
- Always a good idea, and successful a majority of the time
- Require authority to bind (minimum is reachable decision maker)
- This step slows process down (Is time an issue?)
Arbitration
- Binding (preferred)
- Nonbinding (operates to give both sides a view of how a court may decide the issues and facilitate settlement, but may give losing party idea of how to improve arguments. Risky, time consuming, added expense)
Other alternatives (for example., mini-trial with mock judge and jury)
Provide whether mediation may continue even though arbitration has begun
Specify size and skill set of ADR panel One mediator (allow mediator expert help in complex or multi-party cases)
One arbitrator (quicker process, less expense)
Three arbitrators (preferred for big $$$ or complex matters)
- Decisions by majority, more consensus decision making
- Broader experience base applied to decisions
- Slower process, more expensive
Specify neutral’s required skill set and background
- Lawyer
- Former judge
- Nonlawyer professional (for example, accountant, architect, engineer)
- Knowledge of specific law areas or jurisdiction’s law
- Knowledge of type of specific business or industry
- Educational background or licenses
- ADR neutral training and experience
Name specific neutral or panel list from which neutral must be drawn
Specify location of ADR proceedings
Specific city, state
Specific site (party, ADR entity or neutral)
Specify only site-selection process (for example, the neutral selects)
Allow claimant to select convenient or dispute-related site
Specify scope of issues and parties subject to ADR
All inclusive (use magic words "all disputes arising out of or relating to")
All inclusive with carve-outs, e.g., subject-matter carve-outs (for example, patent disputes) or claim value carve-outs (matters within small claims court jurisdiction or determined by arbitrator to be above a specified $$$ amount)
Only specific issues subject to ADR
Only signatory parties can/must adjudicate disputes in ADR
Permit/require additional third-party beneficiaries (for example, suppliers, affiliates) to adjudicate disputes in ADR
Expressly prohibit joinder of disputes or parties from other contracts (that is, prohibit creation of class actions)
Include claims arising under prior or related contracts (address impact of superseding contractin ADR and merger clauses)
- Make all disputes subject to ADR even if arises from prior contract, or
- Only disputes arising out of or related to new contract
Specify who determines arbitrability and scope questions
- Absent contract provision, the court determines threshold questions of arbitrability and scope
- Specify that arbitrator determines all threshold issues of arbitrability and scope (preferred)
Specify who determines applicability of statutes of limitations and issue preclusion
- Court (absent contract provision court determines issue)
- Arbitrator (preferred)
Specify that arbitrator determines all issues of contract validity
Specify applicable substantive law
Specify that Federal Arbitration Act governs and enforces the ADR obligation and that state law, excluding its choice of law and its ADR law, governs all other substantive matters (preferred, if contract involves interstate commerce), or
Specify state ADR law and state substantive law
Provide for specific limitations periods that apply to disputes
- Provide for application of state law statutes of limitation, and allow parties to seek injunctive relief in court to preserve claims; or
- Provide for tolling of state statutes of limitations on notice of dispute; or
- Provide for special limitations for adjudicating disputes and specify that state statutes do not apply
Provide that arbitrator must follow applicable legal privileges (for example, lawyer-client and work-product privilege)
Be sure to conform boilerplate provisions in contract, for example, choice of law with the choice of law language in the ADR provision
Specify applicable ADR procedural rules
Allow neutral panel to determine all procedures, or
Include most procedures in ADR provision by incorporating ADR entity rules:
- Nonadministered (for example, CPR commercial arbitration rules)
- Administered (for example, AAA commercial arbitration rules)
- Special sector rules of an ADR entity (for example, AAA construction, AAA complex commercial), and
- Allow neutral panel to provide for any other required procedure
- Provide that ADR contract provisions supplement and override conflicting ADR entity rules
Provide for application of all or specific federal or state rules of procedure
Provide for application of federal or state rules of evidence
Specify permitted type of hearing
- Oral hearing before arbitrator for presentation of evidence required
- Permit telephonic or electronic proceedings (or portions of proceedings)
- Permit resolution of dispute by arbitrator based on written submissions and documents
Provide specific time limits for each ADR step and for the issuance of an arbitration decision and award
Provide arbitrator power to conduct proceedings and render award when party refuses to participate or cooperate
Specify arbitrator obligations and restrictions
Specify any desired limits of arbitrator discretion,
Always specify that arbitrator must follow dictates of agreement,
Provide whether arbitrator must apply applicable substantive law to dispute
Specify permitted scope of review of ADR award
Permit only that provided by applicable federal or state ADR statute, or
Expressly provide that arbitration award is not reviewable for error of law by arbitrator, only manifest disregard of the law, or
Create private review panel (for example, three-person panel to review entire decision and award or only for errors of law), or
Grant courts right to review beyond applicable statute (for example, right to review for errors of settled law) (this is dangerous and unsettled ground)
Specify extent of confidentiality
Confidentiality of existence and nature of the dispute
Confidentiality of information provided or statements made in prior ADR step
Confidentiality of information provided or statements made in arbitration
Confidentiality of the reasoned decision and/or the award
Confidentiality of the disclosures, statements, decision or award in any other subsequent litigation proceedings regarding same dispute
Specify whether proceedings may be transcribed or recorded
Specify permitted scope and methods of discovery
Adopt ADR entity rules concerning discovery
Adopt ADR entity rules concerning discovery with specific additions or overriding exceptions, or
Adopt civil discovery rules with or without specific additions or exceptions
Exclude civil discovery rules with exceptions, for example, provisions for third-party subpoenas and extraterritorial party subpoenas
Provide that arbitrator shall determine all issues regarding the scope and types (for example, depositions) of permitted discovery
Specifically provide in detail for the scope and type of discovery that will be permitted, with administration by the arbitrator (for example, no depositions, no interrogatories, no party-issued subpoenas (arbitrator-issued only), mandatory pre-hearing meetings for sharing of documents and lists of potential witnesses)
Specify type, timing and confirmation of award
Rely on ADR entity procedural rules
Require written, reasoned decision and award
Permit only bare award (no reasoned basis for award)
Specifically permit arbitrator to resolve issues by summary judgment, that is, based on documents without oral testimony from witnesses found to be irrelevant by arbitrator
Provide for confirmation and entry of arbitrator’s award in any court of competent jurisdiction
Provide whether the decision and award may be given res judicata effect in subsequent proceeding between the parties
Specify relief available from arbitrator and court
Be silent on the issue of relief (rely on decisional law)
Specify that arbitrator may provide for any relief available at law or equity and not otherwise lawfully restricted by the parties’ agreement, for example, giving effect to contract’s limited warranty and limitations of liability provisions
Provide for specific limitations on the scope of relief the arbitrator may award, for example, no punitive damages, no attorney’s fees, no consequential damages, no specific performance, only monetary relief (no injunctions)
Permit arbitrator to issue injunctive relief, including requiring party to seek dissolution of court injunctions that conflict with ADR process or relief awarded
Expressly make taking dispute to court rather than submitting it to the required ADR process a breach of contract for which arbitrator must grant relief and attorney’s fees
Provide for party absorption of own attorney’s fees, costs and ADR fees
Provide for award of attorney’s fees and costs to prevailing party
Provide for sharing of mediator and arbitrator fees and ADR fees
Provide for arbitrator allocation of all or some of the ADR fees (for example, loser pays)
Allow parties to seek injunctive relief in court solely to preserve status quo or to preserve statutes of limitations
Miscellaneous considerations
Specify precise process for and timing of initiation of each step of ADR
- Method (for example, written demand or notice)
- Set time limits for each step
Specify scope of disputes subject to particular ADR proceeding
- Only those disputes specifically set forth in the demand and the other party’s response to that particular demand, or
- Require joinder of all known outstanding disputes and waiver of disputes not expressly joined or set forth in written demand
- Specify that each separate dispute (if not waived) must go through all ADR steps (no skipping steps, no surprise disputes)
Specify what happens when one party fails to pay fees of administering ADR entity or neutral
- Allow other party to pay to permit ADR to continue administration, or
- Provide that failure to pay
