To be of maximum benefit, an arbitration clause should address the special needs of the parties involved. An inadequate arbitration clause may produce as much delay, expense and inconvenience as a traditional lawsuit. When writing an arbitration clause, keep in mind that its purpose is to resolve disputes, not create them. If disagreements arise over the meaning of the arbitration clause, it is often because it failed to address the particular needs of the parties. Drafting an effective arbitration agreement is the first step on the road to successful dispute resolution.


PREMIUM LEGAL RESOURCES LEGAL FORMS ASK A LAWYER

by the American Arbitration Association

Every year, millions of business contracts are written which provide for arbitration as a means of resolving disputes. Most provide for administration by the American Arbitration Association, a public- service, not-for-profit organization offering a broad range of dispute resolution procedures.The AAA's mission is:

The American Arbitration Association is dedicated to the development and widespread use of prompt, effective and economical methods of dispute resolution. As a not-for-profit organization, our mission is one of service and education.

We are committed to providing exceptional neutrals, proficient case management, dedicated personnel, advanced education and training, and innovative process knowledge to meet the dispute resolution needs of the public now and in the future.

Services are available through offices located in major cities throughout the United States. Hearings may be held at locations convenient for the parties. In addition, the AAA provides education and training, issues specialized publications, and conducts research on out-of-court dispute settlement.

Typically, the parties' agreement to arbitrate is contained in a future- disputes clause which, when inserted in their contract, provides that any disagreements will be resolved through arbitration under the rules of the American Arbitration Association.

During the more than 60 years of its existence, the AAA has refined its standard arbitration clause. This clause, when linked to AAA's administration, offers the parties a simple, time-tested means of resolving disputes. Occasionally, parties or their counsel desire additional provisions.

This booklet has been prepared as a general guide for drafting dispute resolution clauses.

* It contains examples of clauses and portions of clauses that have been used by parties in cases filed with the AAA. The readers should feel free to contact the AAA for further information.

* Specialized guides have also been prepared for drafting dispute resolution clauses for employment, as well as professional accounting and related services.

1994; all rights are reserved by the American Arbitration Association.

TABLE OF CONTENTS

Major Features of Arbitration
Standard Arbitration Agreements
Customized Arbitration Agreements
Mini-Trial
Negotiation
Mediation
Mediation/Arbitration
Arbitration/Mediation
Governing Law
Provisional Remedies
Conditions Precedent to Arbitration
Escrow Provision
Locale Provisions
Language
Bifurcation
Arbitrator Selection
Number and Qualifications of Arbitrators
Nationality of Arbitrator
Consolidation
Remedies
Confidentiality
Award Provisions
Discovery
Judicial Reference
Written Opinions
Appeal
Fees and Expenses
Large, Complex Case Dispute Resolution Prgm
International Disputes
Conclusion

MAJOR FEATURES OF ARBITRATION

Arbitration is a private, informal process by which all parties agree, in writing, to submit their disputes to one or more impartial persons authorized to resolve the controversy by rendering a final and binding award. It is used for a wide variety of disputes: from commercial disagreements involving construction, securities transactions, computers, or real estate (to name just a few), to insurance claims and labor union grievances.

The major features of arbitration are:

1. A written agreement to resolve disputes by the use of impartial arbitration. Such a provision may be inserted in a contract for the resolution of future disputes, or may be an agreement to submit to arbitration an existing dispute.

2. Informal procedures. Under the rules, the procedure is relatively simple; strict rules of evidence are not applicable; there is no motion practice or formal discovery; there are no requirements for transcripts of the proceedings or for written opinions of the arbitrators. Though there is no formal discovery, the AAA's various commercial rules* allow the arbitrator to require the production of relevant documents. The AAA's rules are flexible and can be varied by mutual agreement of the parties.

3. Impartial and knowledgeable neutrals to serve as arbitrators. Arbitrators are selected for specific cases because of their knowledge of the subject matter. Based on that experience, arbitrators can render an award grounded on thoughtful and thorough analysis.

4. Final and binding awards which are enforceable in a court. Court intervention and review is limited by applicable state or federal arbitration laws, and award enforcement is facilitated by these same laws.

* See back cover for listing of AAA rules and procedures.

STANDARD ARBITRATION AGREEMENTS

It is not enough to state that "disputes arising under the agreement shall be settled by arbitration." While this language indicates the parties' intent to arbitrate and may authorize a court to enforce the clause, it leaves many issues unresolved. Issues such as to when, where, how, and before whom a dispute will be arbitrated, are subject to disagreement, with no way to resolve them except to go to court.

The standard arbitration clause suggested by the American Arbitration Association addresses those questions. It has proven highly effective in over a million disputes. The parties can provide for the arbitration of future disputes by inserting the following in their contracts:

STD1 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 in accordance with its [applicable] rules and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.

The arbitration of existing disputes may be accomplished by use of the following:

STD2 We, the undersigned parties, hereby agree to submit to arbitration administered by the American Arbitration Association under its [applicable] rules the following controversy [cite briefly]. We further agree that we will faithfully observe this agreement and the rules, and that we will abide by and perform any award rendered by the arbitrator(s) and that a judgment of the court having jurisdiction may be entered upon the award.

The above clauses, which refer to the time-tested rules of the AAA, have consistently received judicial support. The standard clause is often the best to include in a contract. By invoking the AAA's rules, these clauses meet the requirements of an effective arbitration clause:

1. It makes clear that all disputes are arbitrable. Thus, it minimizes dilatory court actions to avoid the arbitration process.

2. It is self-enforcing. Arbitration can continue despite an objection from a party, unless the proceedings are stayed by court order or by agreement of the parties.

3. It provides for a complete set of rules and regulations. This feature eliminates the need to spell out rules and regulations in the parties' agreement.

4. It provides for the appointment of an impartial neutral. Arbitrators are selected by the parties from a large pool of available experts. Under the AAA rules, a procedure is available to disqualify an arbitrator for bias.

5. It settles disputes over the locale of the proceeding. When the parties disagree, locale determinations are made by the AAA as administrator, alleviating the need for direction from the courts.

6. It can provide for administrative conferences. If the clause provides for the AAA's Commercial Arbitration Rules, Construction Industry Arbitration Rules, or related rules for resolving business disputes, there is a provision for an administrative conference with the parties' representatives and an AAA staff member to expedite the arbitration proceedings.

7. It can provide for preliminary hearings. If the clause provides for the AAA's various commercial arbitration rules, a preliminary hearing can be arranged in large and complex cases to specify the issues to be resolved, clarify claims and counter claims, provide for an exchange of information, and consider other matters that will expedite the arbitration proceedings.

8. Mediation is available. If the clause provides for the AAA's various commercial arbitration rules, mediation conferences can be arranged to facilitate a mutual settlement, without additional administrative cost to the parties.

9. It establishes time limits to assure prompt disposition of disputes. An additional feature of the AAA's various commercial arbitration rules are the Expedited Procedures which are used to resolve smaller claims.

10. It insulates the arbitrator from the parties. Under the vast majority of rules which provide for the resolution of business disputes, the AAA channels communications between the parties and the arbitrator, which serves to protect the continued neutrality of the arbitrator and the process.

11. It establishes a procedure for the serving of notices. Depending on the rules used and the type of the case, notices can be served by regular mail, addressed to the party or its representative at the last known address. Under most of the rules, the AAA and the parties may use facsimile transmission, telex, telegram, or other written forms of electronic communication to give the notices required by the rules.

12. It gives the arbitrator the power to decide matters equitably and to fashion any appropriate relief, including specific performance. The AAA rules allow the arbitrator to grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract.

13. It allows ex parte hearings. A hearing can be held in the absence of a party who was given due notice. Thus, a party cannot avoid an adverse award by merely refusing to appear.

14. It provides for enforcement of the award. The award can be enforced in any court having jurisdiction, with only limited grounds for resisting the award.

CUSTOMIZED ARBITRATION AGREEMENTS

The standard clause does not always meet the mutual needs of the parties. Arbitration being a consensual process, the parties are free to design their arbitration agreement in whatever manner they choose.

To assist in drafting arbitration clauses that modify or add to the standard clause, the following examples of arbitration clauses used by parties to accomplish a variety of purposes have been compiled. Although the Association does not specifically recommend these clauses, they illustrate some of the choices made by parties in addressing the various areas described below.

One important "drafting pointer" should be noted here. If, in a domestic transaction as distinguished from an international transaction, the parties desire that the arbitration clause be final and binding, and subject to enforcement in a court of appropriate jurisdiction, it is essential that the clause contain an "entry of judgment" provision, such as that found in the standard arbitration clause ("and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof").

MINI-TRIAL

The mini-trial is a structured dispute resolution method in which senior executives of the parties involved in a dispute meet in the presence of a neutral advisor and, after hearing presentations of the merits of each side of the dispute, attempt to formulate a voluntary settlement. A clause providing for mini-trial might read:

MT1 Any controversy or claim arising out of or relating to this contract shall be submitted to the American Arbitration Association under its Mini-Trial Procedures.

NEGOTIATION

The parties may wish to attempt to resolve their disputes through negotiation prior to arbitration. A sample of a clause which provides for negotiation follows:

NEG1 In the event of any dispute, claim, question, or disagreement arising out of or relating to this Agreement or the breach thereof, the parties hereto shall use their best efforts to settle such disputes, claims, questions, or disagreement. To this effect, they shall consult and negotiate with each other, in good faith and, recognizing their mutual interests, attempt to reach a just and equitable solution satisfactory to both parties. If they do not reach such solution within a period of sixty (60) days, then upon notice by either party to the other, disputes, claims, questions, or differences shall be finally settled by arbitration administered by the American Arbitration Association in accordance with the provisions of its [applicable] rules.

MEDIATION

The parties may wish to attempt mediation before submitting their dispute to arbitration. This can be accomplished by making reference to mediation in the arbitration clause. To be most effective, the mediation clause can specify the AAA's Commercial or Construction Industry Mediation Rules. Examples of such language follows:

MED1 If a dispute arises out of or relates to this contract, or the breach thereof, and if said dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Rules, before resorting to arbitration, litigation, or some other dispute resolution procedure.

MED2 The parties hereby submit the following dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Rules. [The clause may also provide for the qualifications of the mediator(s), method of payment, locale of meetings, and any other item of concern to the parties.]

MEDIATION/ARBITRATION

A clause can be inserted into a contract that first provides for mediation under the AAA's mediation rules. If the mediation is unsuccessful, the dispute would then go to arbitration under the AAA's arbitration rules. This process is sometimes referred to as "Med#Arb." Samples of med#arb clauses follow:

MEDARB1 If a dispute arises out of or relates to this contract, or the breach thereof, and if said dispute cannot be settled through direct discussions, the parties agree to first endeavor to settle the dispute in an amicable manner by mediation administered by the American Arbitration Association under its Commercial Mediation Rules, before resorting to arbitration. Thereafter, any unresolved controversy or claim arising out of or relating to this contract, or breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and judgment upon the Award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

MEDARB2 Any other claim, dispute or other matter in question arising out of or related to this Agreement or breach thereof shall be settled in accordance with Article 4 of AIA Document A201, except that in addition to and prior to arbitration, the parties shall endeavor to settle disputes by mediation in accordance with the Construction Industry Mediation Rules of the American Arbitration Association arising under this Paragraph shall be conducted in accordance with the provisions of Subparagraphs 9.1.2 and 9.1.3.*

MEDARB3 If a monetary dispute arises out of or relating to this contract, the parties agree to first submit it to mediation administered by the American Arbitration Association under its Commercial Mediation Rules and, if unable to agree upon a settlement amount, to submit their dispute to a neutral person appointed by the AAA who shall select between their final negotiated positions, that selection being binding upon the parties.

* Reprinted from AIA Document A121/CMc and AGC Document 565, Standard Form of Agreement Between Owner and Construction Manager- 1991 Edition. The AIA/AGC should be contacted for instructions on the use of its Form Documents.

ARBITRATION/MEDIATION

Parties can also provide for arbitration/mediation which works as follows: the arbitration proceeds along the traditional track, with the arbitrator rendering an award. The decision is then sealed for a period certain, during which the parties attempt to mediate. If the dispute is successfully settled in mediation, the award is destroyed or transmitted to the parties, pursuant to the terms of the parties' agreement. If the mediation does not produce a settlement, the award is issued and is fully enforceable and binding.

ARBMED1 Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall first be submitted to arbitration administered by the American Arbitration Association in accordance with its [applicable] rules. The award rendered by the arbitrator under the rules shall be sealed for [specify number] days while the parties attempt to mediate the dispute. Said mediation shall be administered by the American Arbitration Association under its [applicable] mediation rules. The mediator shall not be the arbitrator previously appointed to hear the dispute. If the mediation is successful, the parties agree that the award of the arbitrator shall be [destroyed] [transmitted to the parties for their information]. If the mediation is unsuccessful, the award of the arbitrator shall be transmitted to the parties and judgment upon said award may be entered in any court having jurisdiction thereof.

GOVERNING LAW

It is not uncommon for parties to specify the law that will govern the contract and/or the arbitration proceedings. Some examples follow:

GOV1 . . . shall be resolved by arbitration in accordance with Title 9 of the U.S. Code (United States Arbitration Act) and the Commercial Arbitration Rules of the American Arbitration Association.

GOV2 This contract shall be governed by the laws of the State of [specify].

GOV3 . . . shall be settled by arbitration in accordance with [state] Arbitration Law and administered by the American Arbitration Association under its [applicable] rules.

GOV4 In rendering the award, the arbitrator shall determine the rights and obligations of the parties according to the substantive and procedural laws of [state].

GOV5 The parties acknowledge that this agreement evidences a transaction involving interstate commerce. The United States Arbitration Act shall govern the interpretation, enforcement, and proceedings pursuant to the arbitration clause in this agreement.

In international cases, where the parties have not provided for the law applicable to the substance of the dispute, the AAA's International Arbitration Rules contain specific guide lines for arbitrators regarding applicable law. See discussion of international disputes on page 36.

PROVISIONAL REMEDIES

While the AAA's rules give the arbitrator the authority to grant interim relief, the parties may wish to make this power explicit, or give themselves the option of applying to court for provisional remedies, in conjunction with the arbitration process. This can be accomplished as follows:

PROV1 Any provisional remedy which would be available from a court of law, shall be available from the arbitrator, to the parties to this Agreement pending arbitration.

PROV2 Either party may make an application to the arbitrator seeking injunctive relief to maintain the status quo until such time as the arbitration award is rendered or the controversy is otherwise resolved.

PROV3 Either party may, without inconsistency with this agreement, seek from a court any interim or provisional relief that may be necessary to protect the rights or property of that party, pending the establishment of the arbitral tribunal (or pending the arbitral tribunal's determination of the merits of the controversy).

PROV4 Either party may apply to any court having jurisdiction hereof and seek injunctive relief so as to maintain the status quo until such time as the arbitration award is rendered or the controversy is otherwise resolved.

Note that the AAA's rules also provide for interim relief by the arbitrator upon the application of a party.

CONDITIONS PRECEDENT TO ARBITRATION

By agreement of the parties, certain conditions may have to occur before a dispute is ready for arbitration. Examples of conditions precedent include written notification of claims within a fixed period of time and exhaustion of other contractually established procedures. These kinds of provisions may, however, be a source of delay. Examples of "conditions precedent" language follows:

CONPRE1 If a dispute arises out of or relates to this contract, the parties agree that senior management will try in good faith to settle the dispute within thirty days thereafter before resorting to arbitration administered by the American Arbitration Association under its [applicable] rules.

CONPRE2 Any controversy or claim arising out of or related to the contract, or the breach thereof, shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof, except controversies or claims relating to aesthetic effect and except those waived as provided for in Subparagraph 4.3.5. Such controversies or claims upon which the Architect has given notice and rendered a decision as provided in Subparagraph 4.4.4 shall be subject to arbitration upon written demand of either party. Arbitration may be commenced when 45 days have passed after a claim has been referred to the Architect as provided in Paragraph 4.3 and no decision has been rendered.*

Under a broad arbitration clause, i.e., one which encompasses "any claim arising out of or relating to" a contract, the question of whether a claim has been asserted within an applicable time limit is generally regarded as an arbitrable issue.

* Reprinted from AIA Document A201, General Conditions of the Contract for Construction-1987 Edition. The AIA should be contacted for instructions on the use of its Form Documents.

ESCROW PROVISION

Pending the outcome of the arbitration, parties may agree to hold in escrow money, a letter of credit, goods or the subject matter of the arbitration. A sample of such a clause providing for escrow follows:

ESC1 Pending the outcome of the arbitration [name of party] shall place in escrow with [law firm, institution or AAA] as escrow agent, [the sum of _____________, letter of credit, goods, or subject matter in dispute]. The escrow agent shall be entitled to release such [funds, letter of credit, goods or subject matter in dispute] as directed by the arbitrator(s) in the award, unless the parties agree otherwise in writing.

LOCALE PROVISIONS

Parties may want to add language specifying the place of the arbitration. Examples of locale provisions which may appear in an arbitration clause follow:

LOC1 Any controversy relating to this Agreement or any modi- fication or extension of it, shall be resolved by arbitration in the city of [specify], administered by the American Arbitration Association under the then prevailing [applicable] rules.

LOC2 Any controversy or claim arising out of or relating to this Agreement or the breach thereof will be settled by arbitration administered by the American Arbitration Association in accordance with its [applicable] rules then in effect, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. Any such arbitration will be conducted in the city nearest the customer's main U.S. office having an AAA regional office.

LOC3 The arbitration proceedings shall be conducted in [city], [state].

LOC4 The site of the arbitration shall be [city], [state].

LOC5 The arbitration shall be held in [city], [state], or at such other place as may be selected by mutual agreement.

LOC6 . . . shall be settled by arbitration in [city], [state], under the [applicable] Rules then obtaining of the American Arbitration Association.

In specifying a locale, parties also should consider:
(1) the convenience of the location (e.g., availability of local counsel, transportation, hotels, meeting facilities, etc.);
(2) the available pool of qualified arbitrators within the geographical area;
(3) the applicable procedural and substantive law. Of particular importance in international cases is the applicability of a convention providing for the recognition and enforcement of arbitral agreements and awards, and the arbitration regime at the chosen site.

LANGUAGE

In matters involving multi-lingual parties, the arbitration agreement often specifies the language in which the arbitration will be conducted. An example of such language follows:

LANG1 The language(s) of the arbitration shall be [specify].

LANG2 The arbitration shall be conducted in the [specify] language but at the request and expense of a party, documents and testimony shall be translated into [specify language].

LANG3 The arbitration shall be conducted in the language in which the contract was written.

Such arbitration clauses could also deal with the selection and cost of an interpreter.

BIFURCATION

Parties can provide in their arbitration clause for a bifurcated proceeding. For instance, the parties can agree that evidence and testimony first be given on the issue of liability. If liability is found, the proceedings would continue on the issue of damages. If liability is not found, the matter might be declared closed and a final award issued against the claimant. Such a clause might read:

BIF1 The parties agree that the arbitrator shall rule as to liability prior to receiving evidence or testimony on any damage claim. In the event liability is found, the arbitration proceeding shall continue before the same arbitrator to resolve any and all damage issues.

ARBITRATOR SELECTION

Under the AAA's arbitration rules, arbitrators are generally selected using a listing process. The AAA administrator provides each party with a list of proposed arbitrators who are generally familiar with the subject matter involved in the dispute. Each side is provided ten days to strike any names deemed unacceptable, number the remaining names in order of preference, and return the list to the Association. The AAA then invites arbitrators to serve from among those names remaining on the list, in the designated order of mutual preference.

The parties may use other arbitrator appointment systems, such as the party-appointed method in which each side designates one arbitrator, and the two thus selected appoint the chair of the panel. This method is not recommended by the AAA, because use of partisan arbitrators can delay the process and produce compromise awards or deadlocks. One way to address those problems is to agree that party-appointed arbitrators serve in a neutral capacity.

The parties' arbitration clause can also specify by name the individual the parties want as their arbitrator.

All of these issues and others can be dealt with in the arbitration clause. Some illustrative provisions are noted below:

ARBSEL1 In the event arbitration is necessary, [name of specific arbitrator] shall act as the arbitrator.

ARBSEL2 The arbitrator selected by the claimant and the arbitrator selected by respondent shall, within ten days of their appointment, select a third neutral arbitrator. In the event that they are unable to do so, the parties or their attorneys may request the American Arbitration Association to appoint the third neutral arbitrator. Prior to the commence- ment of hearings, each of the arbitrators appointed shall take an oath of impartiality.

ARBSEL3 Within fifteen days after the commencement of arbitration, each party shall select one person to act as arbitrator, and the two selected shall select a third arbitrator within ten days of their appointment. If the arbitrators selected by the parties are unable or fail to agree upon the third arbitrator, the third arbitrator shall be selected by the American Arbitration Association.

When providing for direct appointment of the arbitrator(s) by the parties, it is best to specify a time frame within which same must be accomplished. Also, in many jurisdictions, the law permits the court to appoint arbitrators where privately agreed means fail. Such a result may be time-consuming, costly and unpredictable. Parties who seek to establish an ad hoc method of arbitrator appointment may be well advised to provide a fallback, such as, should the particular procedure fail for any reason, "arbitrators shall be appointed as provided in the AAA Commercial Arbitration Rules."

NUMBER AND QUALIFICATIONS OF ARBITRATORS

Parties often have very definite ideas about the qualifications of an arbitrator appointed to a dispute. The qualifications requirements may include specific educational, professional or training experience. Parties concerned about the number of arbitrators appointed in a case can pre-determine whether the dispute shall be heard by one arbitrator or by a panel of three arbitrators. Typical additions to an arbitration clause dealing with such matters are:

QUAL1 The arbitrator shall be a certified public accountant.

QUAL2 The arbitrator shall be a retired judge of the [specify] Court.

QUAL3 The arbitration proceedings shall be conducted before a panel of three neutral arbitrators, all of whom shall be members of the Bar of the State of [specify], actively engaged in the practice of law for at least ten years.

QUAL4 The panel of three arbitrators shall consist of one contractor, one architect and one construction attorney.

QUAL5 Arbitrators must be members of the [specify] State Bar actively engaged in the practice of law with expertise in the process of deciding disputes and interpreting contracts in [the particular field of law involving the subject controversy].

QUAL6 The arbitrators will be selected from a panel of persons having experience with and knowledge of electronic computers and the computer business, and at least one of the arbitrators selected will be an attorney.

QUAL7 One of the arbitrators shall be a member of the Bar of the State of [specify], actively engaged in the practice of law, or a retired member of the state or federal judiciary.

QUAL8 The arbitration shall be before one neutral arbitrator to be selected in accordance with the Commercial Rules of the American Arbitration Association and shall proceed under the Expedited Procedures of said Rules, irrespective of the amount in dispute.

QUAL9 In the event any party's claim exceeds $1 million, exclusive of interest and attorneys' fees, the dispute shall be heard and determined by three arbitrators.

NATIONALITY OF ARBITRATOR

Parties may wish to specify that the arbitrator should or should not be a national or citizen of a particular country. The following examples can be added to the arbitration clause to deal with this concern:

NATLY1 The arbitrator appointed to hear and decide disputes under this provision shall be a citizen of [country].

NATLY2 The arbitrator shall be a national of [country].

NATLY3 The arbitrator shall not be a national of either country of the parties to the dispute.

CONSOLIDATION

Where there are multiple parties with disputes arising from the same transaction, complications may often be reduced by the consolidation of all disputes. Parties can provide for the consolidation of two or more separate arbitrations into a single proceeding or permit the intervention of a third party in an arbitration. In a construction dispute, consolidated proceedings may eliminate the need for duplicative presentations of claims and avoid the possibility of conflicting rulings from different panels of arbitrators. Conversely, consolidating claims might be a source of delay and expense. Examples of language which can be included in an arbitration clause follow:

CONSOL1 The owner, the contractor, all subcontractors, speciality contractors, material suppliers, engineers, designers, architects, construction lenders, bonding companies, and all other parties concerned with the construction of the structure are bound, each to each other, by this arbitration clause, provided such party has signed this contract, or has signed a contract which incorporates this contract by reference, or signs any other agreement to be bound by this arbitration clause.

CONSOL2 Arbitration proceedings under this agreement may be consolidated with arbitration proceedings pending between other parties if the arbitration proceedings arise out of the same transaction or relate to the same subject matter. Consolidation will be by order of the arbitrator, in any of the pending cases, or if the arbitrator fails to make such an order, the parties may apply to any court of competent jurisdiction for such an order.

CONSOL3 No arbitration arising out of or relating to the Contract Documents shall include, by consolidation or joinder or in any other manner, the Architect, the Architect's employees or consultants, except by written consent containing specific reference to the Agreement and signed by the Architect, Owner, Contractor and any other person or entity sought to be joined. No arbitration shall include, by consolidation or joinder or in any other manner, parties other than the Owner, Contractor, a separate contractor as described in Article 6 and other persons substantially involved in a common question of fact or law whose presence is required if complete relief is to be accorded in arbitration. No person or entity other than the Owner, Contractor or a separate contractor as described in Article 6 shall be included as an original third party or additional third party to an arbitration whose interest or responsibility is unsubstantial. Consent to arbitration involving an additional person or entity shall not constitute consent to arbitration of a dispute not described therein or with a person or entity not named or described therein. The foregoing agreement to arbitration and other agreements to arbitrate with an additional person or entity duly consented to by parties to the Agreement shall be specifically enforceable under applicable law in any court having jurisdiction thereof.*

* Reprinted from AIA Document A201, General Conditions of the Contract for Construction--1987 Edition. The AIA should be contacted for instruction on the use of its Form Documents.

REMEDIES

Under a broad arbitration clause and most AAA rules, the arbitrator may grant "any remedy or relief that the arbitrator deems just and equitable" within the scope of the parties' agreement. Sometimes, parties want to specifically include or exclude certain remedies. Particular care, however, should be given to this type of arbitration provision, to avoid unnecessary litigation about what issues are arbitrable. Samples of clauses dealing with remedies appear below:

REM1 The arbitrator shall have the authority to award any remedy or relief that a court of this state could order or grant, including, without limitation, specific performance of any obligation created under the agreement, the awarding of punitive damages, the issuance of an injunction, or the imposition of sanctions for abuse or frustration of the arbitration process.

REM2 The arbitrators will have no authority to award punitive damages or any other damages not measured by the prevailing party's actual damages, and may not, in any event, make any ruling, finding or award that does not conform to the terms and conditions of the Agreement.

REM3 Such arbitration shall be conducted in [state], under the auspices of the American Arbitration Association, in accordance with its Commercial Arbitration Rules before a partner of [specify name of accounting firm], an independent public accounting firm. The scope of the arbitration shall be limited to whether the Closing Financial Statements and/or the Statement of Seller's [specify year] Sales were true and complete and were prepared in accordance with Generally Accepted Accounting Principles consistently applied.

REM4 Arbitrators shall be empowered to impose sanctions and to take such other actions with regard to the parties as the arbitrators deem necessary to the same extent a judge could, pursuant to the Federal Rules of Civil Procedure, the [state] Rules of Civil Procedure and applicable law.

CONFIDENTIALITY

While the confidentiality of the hearings is protected by AAA rules, and the arbitrators are expected to adhere to ethical standards concerning confidentiality (see AAA-ABA Code of Ethics for Arbitrators in Commercial Disputes, Canon VI), parties may also wish to impose limits on themselves as to how much information regarding the dispute may be disclosed outside the hearing. The following language may serve this purpose:

CONF1 Neither party nor the arbitrators may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of both parties.

The above language could also be modified to restrict the disclosure of only certain information (i.e. "trade secrets").

AWARD PROVISIONS

The arbitration clause can be specifically worded to limit the remedial power of the arbitrator, even if the evidence indicates that greater relief might be warranted. For example, the clause may establish high and low figures beyond which the arbitrator may not award. This is called "high- low" arbitration. In some agreements, the arbitrator is made aware of the high-low figures; in others this information is not provided to the arbitrator, but is contained in a separate "control contract" between the parties. Another variation is "last best offer" arbitration, also known as "baseball" arbitration. In this system, the parties negotiate to their final positions, and the arbitrator is compelled to select the figure of one party or the other-nothing in between, above, or below. While provisions such as these are permissible and sometimes appropriate, they have the potential to produce results that are unusual or unintended. Such provisions should only be adopted with careful fore thought and negotiation. Examples of such arbitration clauses follow.

High/Low or Control Clause; Arbitrator Not Informed of Limits:

AWARD1 In the event the arbitrator denies the claim or awards an amount less than the minimum amount of [specify], then this minimum amount shall be paid to claimant. Should the arbitrator's award exceed the maximum amount of [specify], then this maximum amount shall be paid to the claimant. It is further understood between the parties that if the arbitrator awards an amount between the minimum and the maximum stipulated range, then the exact awarded amount will be paid to the claimant. The parties further agree that this agreement is private between them and will not be disclosed to the arbitrator.

High/Low Clause; Arbitrator Informed of Limits

AWARD2 Any award of the arbitrator in favor of [specify party] and against [specify party] shall be at least [specify dollar amount] but shall not exceed [specify dollar amount]. [Specify party] expressly waives any claim in excess of [specify dollar amount] and agrees that its recovery shall not exceed that amount. Any such award shall be in satisfaction of all claims by [specify party] against [specify party].

Last Best Offer or "Baseball Clause":

AWARD3 Each party shall submit to the arbitrator and exchange with each other in advance of the hearing their last best offers. The arbitrator shall be limited to awarding only one or the other of the two figures submitted.

AWARD4 The parties agree that the arbitration to be employed by the panel shall be "baseball arbitration." Each party shall present to the panel, for each taxable year at issue, the total income amount that Apple Singapore would have earned at arm's length relating to the PCBN and system manufacture/assembly, taking into account all sales, service, and use of intangible property transactions, if any, between Apple and Apple Singapore, respectively. The parties are specifically limited to presenting to the panel only one amount for each taxable year in dispute. For each taxable year in dispute, the panel shall select one of the amounts presented by the parties for that specific tax year.*

* Reproduced from Apple Computer Inc. and Consolidated Subsidiaries vs Commissioner of Internal Revenue, United States Tax Court, Docket No. 21781--90.

DISCOVERY

Discovery frequently is time-consuming and expensive. While full- blown discovery is seldom recommended in arbitration, information exchange can be beneficial in large, complex cases. For such cases, the AAA's various commercial arbitration rules provide for an administrative conference with the AAA staff, and/or a preliminary hearing with the arbitrator. The purposes of such meetings are to:

(1) clarify the issues to be resolved;
(2) specify the claims of each party;
(3) identify any witnesses to be called; and, at a preliminary hearing,
(4) establish the extent of and schedule for the production of relevant documents and other information.

In addition to the information exchanges facilitated by the above provision of the AAA rules, some parties favor traditional discovery. The following language can serve this purpose:

DISC1 The arbitrator shall have the discretion to order a pre-hearing exchange of information by the parties, including, without limitation, production of requested documents, exchange of summaries of testimony of proposed witnesses, and examination by deposition of parties.

DISC2 The parties shall allow and participate in discovery in accordance with the Federal Rules of Civil Procedure for a period of ninety (90) days after the filing of the Answer or other responsive pleading. Unresolved discovery disputes may be brought to the attention of the chair of the arbitration panel and may be disposed of by the chair of the panel.

DISC3 Limited civil discovery shall be permitted for the production of documents and taking of depositions. All discovery shall be governed by the [specify] Rules of Civil Procedure. All issues regarding conformation with discovery requests shall be decided by the arbitrator.

If the parties do agree to discovery, they might include time limitations as to when all discovery should be completed. The parties also should provide for resolution of outstanding discovery issues by the arbitrator.

JUDICIAL REFERENCE

Under the laws of some states, courts may refer all or some issues of a pending litigation to a referee, who is authorized to issue a report on certain issues of the dispute. Toward that end, the AAA has developed special Judidical Reference Procedures. Parties may also stipulate to use the judicial reference process, either after a dispute arises or prior to same by use of a contractual clause. Model language for these purposes is set forth below:

JUDREF1 Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined, at the request of either party, by a general reference conducted by a referee appointed pursuant to the provisions of [specify] and administered by the American Arbitration Association in accordance with its Judicial Reference Procedures. The parties intend this general reference agreement to be specifically enforceable in accordance with [specify].

JUDREF2 It is hereby stipulated by the parties hereto, through their respective undersigned counsel, that trial by jury be waived as to [specify] herein; that said [issue or cause] be referred to [name] as referee to hear and determine [said issue or all issues in this case whether of fact or law] and to report his or her statement of decision to the above-entitled court within 20 days after testimony and argument are concluded and that judgment may be entered thereon as if the action had been tried by the court; that the costs of the referee be borne [parties to agree or court to determine at time of appointment]; and that an order to this effect may be entered accordingly without further notice. This general reference shall be administered by the American Arbitration Association pursuant to its Judicial Reference Procedures. With the exception of international and labor relations cases, arbitrators in business disputes customarily render a brief decision without an opinion. The AAA does not encourage commercial arbitrators to write opinions that give reasons for the award in domestic cases. A lengthy written opinion can prolong a proceeding and might open avenues for attack by the losing party. Often, an itemized award can eliminate the need to render an opinion. However, in some situations, parties may desire an award with written findings. In such cases, the following language can be written into their agreement:

OPIN1 The arbitration award shall be in writing and shall specify the factual and legal bases for the award.

OPIN2 The award of the arbitrators shall be accompanied by a reasoned opinion.

OPIN3 Upon the request of a party, the arbitrator's award shall include findings of fact and conclusions of law.

OPIN4 The award shall be in writing and shall be signed by a majority of the arbitrators, and shall include a statement regarding the disposition of any statutory claim.

APPEAL

Experienced parties and their attorneys rarely write arbitration clauses which allow for appeal of the arbitrator's award. Parties generally appreciate the advantage of arbitral finality and recognize that appeals will delay the ultimate resolution of the dispute. However, the parties may provide for an appeal of the arbitrator's award. Parties may also provide for appeals of court decisions, in lieu of appellate court review, by slightly modifying the clause below. An example of such language is:

APP1 Either party may appeal the arbitration panel's award to an appellate arbitrator by filing with the AAA, within twenty days after transmittal of the award, a written brief, not to exceed twenty pages, stating the reasons why the panel's decision should be reversed or modified. The opposing party shall file with the AAA and serve on the appealing party, within twenty days after receiving the appeal brief, an opposition brief, not to exceed twenty pages. The appellate arbitrator shall be appointed directly by the AAA, without submission of lists of proposed arbitrators, and shall be a retired judge of a court of record in the state in which the arbitration was held. Either party may request oral argument which must be conducted within fourteen days following the submission of the final brief. The appellate arbitration shall be based only on the record of the initial hearing and oral argument, if any. The appellate arbitrator shall render a written decision affirming, reversing, modifying or remanding the arbitral panel's decision within twenty days after receiving the final appellate submissions. The appellate arbitrator may reverse, modify or remand the matter for further proceedings by the arbitral panel only on one of the following grounds:

1. Any ground specified in 9 U.S.C. sections 10 or 11;
2. If the award contains material errors of applicable law;
3. If the award is arbitrary or capricious.

The appellate arbitrator may render a final decision on appeal or remand the matter for further proceedings by the arbitral panel.

FEES AND EXPENSES

The rules generally provide that the administrative fees be borne as incurred and that the arbitrators' compensation be allocated equally between the parties, but this can be modified by agreement of the parties. Fees and expenses of the arbitration, including attorneys' fees, can also be dealt with in the arbitration clause. Some typical language dealing with fees and expenses follow:

FEE1 All fees and expenses of the arbitration shall be borne by the parties equally. However, each party shall bear the expense of its own counsel, experts, witnesses, and preparation and presentation of proofs.

FEE2 The prevailing party shall be entitled to an award of reasonable attorney's fees.

FEE3 The arbitrator(s) is authorized to award any parties such sums as shall be deemed proper for the time, expense, and trouble of arbitration, including arbitration fees and attorneys' fees.

FEE4 The arbitrators shall award to the prevailing party, if any, as determined by the arbitrators, all of its costs and fees. "Costs and fees" means all reasonable pre-award expenses of the arbitration, including the arbitrators' fees, administrative fees, travel expenses, out-of-pocket expenses such as copying and telephone, court costs, witness fees and attorneys' fees.

FEE5 The parties shall each bear its own costs and expenses and an equal share of the arbitrators' and administrative fees of arbitration.

FEE6 The arbitrators shall award costs and expenses of the arbitration proceeding in accordance with the provisions of the loan agreement, promissory note and/or other loan documents relating to the credit which is the subject of the arbitrated claim or dispute.

LARGE, COMPLEX CASE PROGRAM

The Large, Complex Case Dispute Resolution Program has been designed primarily for business disputes involving claims of at least $1,000,000, although parties are free to provide for their use in other disputes. The key elements of the Program are:

(1) the selection of arbitrators that satisfy rigorous criteria to insure that the panel is an extremely select one, and the training, orientation and coordination of those arbitrators in a manner designed to facilitate the Program;

(2) the establishment of new procedures for the administration of those cases that elect to be included in the Program;

(3) the flexibility of those parameters so that parties may more speedily and efficiently resolve their disputes;

(4) the administration of large, complex cases by trained, senior AAA staff.

The AAA has established the following criteria for arbitrators serving in the Program.

1. Experience and Competence
a. Fifteen-year business or professional practice involving complex legal or business matters;
b. Extensive experience in dispute resolution;
c. Strong academic background and professional/business credentials preferred;
d. Scholarship and continuing education preferred.

2. Neutrality
a. Commitment to impartiality and objectivity;
b. Freedom from national or cultural prejudice;
c. Independence and open-mindedness.

3. Judicial Capacity
a. Dispute management skills;
b. Judicious temperament: impartiality, patience, courtesy;
c. Talent for adjudication, negotiation and conciliation.

4. Reputation
a. Highest respect of Bar and/or business community;
b. Integrity, patience, courtesy.

5. Commitment and Availability
a. A willingness to serve if nominated, and general availability to serve in accordance with the needs of the parties;
b. Ability to devote time and effort to major disputes;
c. Successful completion of an advanced AAA panelist training course.

6. Quality Control
a. Careful attention paid to selecting panelists to meet the needs of the particular dispute and the desires of the parties;
b. Periodic review of the panel.

The Supplementary Procedures for Large, Complex Disputes have been designed to be extremely party-driven. They will be used upon the agreement of the parties, or where a court or other authorized body directs their application.

The Procedures provide for an early administrative conference with the AAA, and a preliminary hearing with the arbitrators. Documentary exchanges and other essential exchanges of information are facilitated. The Procedures also provide that a statement of reasons may accompany the award, if requested by the parties. The Procedures are meant to supplement the applicable rules the parties have agreed to use. They include the possibility of the use of mediation to resolve some or all issues at an early stage. Parties may also wish to include other provisions, contained in this guide, in their dispute resolution procedures.

The parties can provide for the future application of the Procedures by including the following arbitration clause in their contract:

LCCP1 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 in accordance with its [applicable] Arbitration Rules and the Supplementary Procedures for Large, Complex Disputes, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

A pending dispute can be referred to the Program by the completion of a Submission to Arbitration Agreement, if the underlying contract documents do not provide for AAA administration.

LCCP2 We, the undersigned parties, hereby agree to submit to arbitration administered by the American Arbitration Association under its [applicable] Arbitration Rules and the Supplementary Procedures for Large, Complex Disputes, the following controversy [cite briefly]. We further agree that we will faithfully observe this agreement and the rules, and that we will abide by and perform any award rendered by the arbitrator(s) and that a judgment of the court having jurisdiction may be entered upon the award.

INTERNATIONAL DISPUTES

The American Arbitration Association administers international commercial cases under various arbitration rules either within or outside the United States. The AAA administers cases under its own International Arbitration Rules, as well as under the International Arbitration Rules of the Asia/Pacific Center and the UNCITRAL Rules. The following are samples of arbitration clauses which relate to international disputes:

INTL1 Any controversy or claim arising out of or relating to this contract shall be determined by arbitration administered by the American Arbitration Association in accordance with its International Arbitration Rules.

INTL2 Any controversy or claim arising out of or relating to this contract shall be determined by arbitration in accordance with the International Arbitration Rules of the Asia/Pacific Center.

INTL3 Any dispute, controversy, or claim arising out of or relating to this contract, or the breach, termination, or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules in effect on the date of this contract. The appointing authority shall be the American Arbitration Association. The case shall be administered by the American Arbitration Association in accordance with its "Procedures for Cases Under the UNCITRAL Arbitration Rules."

INTL4 The arbitration proceedings shall be conducted in [city], [country].*

INTL5 The language(s) of the arbitration shall be [specify].*

INTL6 The arbitrator appointed to hear and decide disputes under this provision shall be a citizen of [country].*

* See previous sections dealing with locale, language, and nationality of the arbitrator for additional clauses. The parties may wish to expand any of these clauses by adding a requirement regarding the number of arbitrators appointed to the dispute.

The parties may also submit an international dispute under the AAA's commercial and other specialized arbitration rules, as supplemented by the Supplementary Procedures for International Commercial Arbitration. These procedures do not supersede any provision of the applicable rules but merely codify various procedures customarily used in international arbitration. Included among them are provisions specifying the neutrality of arbitrators, consecutive hearing days, the language of hearings, and opinions. The thrust of the procedures is to expedite international proceedings and keep them as economical as possible.

The enforcement of international awards is addressed by the 1958 U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been ratified by more than 80 nations, and in this hemisphere by the recently adopted Inter-American Convention on International Commercial Arbitration.

CONCLUSION

To be of maximum benefit, an arbitration clause should address the special needs of the parties involved. An inadequate arbitration clause may produce as much delay, expense and inconvenience as a traditional lawsuit. When writing an arbitration clause, keep in mind that its purpose is to resolve disputes, not create them. If disagreements arise over the meaning of the arbitration clause, it is often because it failed to address the particular needs of the parties. Drafting an effective arbitration agreement is the first step on the road to successful dispute resolution.

After a dispute arises, parties can request an administrative conference with a senior staff member of the AAA to assist them in establishing appropriate procedures necessary for their unique case. Such conferences can expedite the arbitration proceedings in many cases.

This brochure describes some of the ways in which some parties have modified the AAA's time-tested standard clause to deal with specific concerns. Given that commercial transactions vary greatly, its purpose is not so much to urge use of the provisions cited, but rather to suggest the range of possible options. To arrive at the most suitable and effective arbitration clause, parties should consult legal counsel for guidance and advice.
-----

This file was prepared from material copyrighted by, and is posted with the permission of, the American Arbitration Association. For more info visit the AAA's web site at http://www.adr.org
-----
Brought to you by - The 'Lectric Law Library
The Net's Finest Legal Resource for Legal Pros & Laypeople Alike.
http://www.lectlaw.com

Google+