Better Arbitrations

Contracting for Profit

Better, Cheaper & Faster Arbitrations

More contracts than ever require arbitration to settle disputes. The contracts typically say that the arbitration will be conducted according to the American Arbitration Association (AAA) rules. But, using the AAA rules without modification can result in costly delays and poor quality decisions, and doesn't give enough incentive to settle. These problems can be avoided by drafting your own rules and including them in the contract.

Using your own rules can produce quicker decisions, provide for higher quality arbiters, and save money. They also send a message that neither party should use the arbitration process as a threat or stall tactic. With these rules, a party should call for arbitration only if it has a strong, legitimate complaint that it wants to pursue quickly and efficiently.

Here are some areas where you can get better results than the AAA rules.

Get Highly Experienced Arbiters

The AAA rules say that unless the parties agree to select the arbitration panel themselves, the AAA will select the panel from its list of acceptable names.

This process can hurt you in two ways: First, it limits your control over the panel members' expertise. You may want the arbiters to be experienced in specific issues; especially if the case is highly technical. Suppose you own a factory and you're trying to stop your tenant from storing what,you think are hazardous materials. You may want an arbitration panel with environmental law experience as well as real estate law experience. The AAA may not select the most experienced arbiters for your case.

Second, you may get generally lessexperienced arbiters from the AAA pool. AAA panelists usually are paid only about $300 per day. That's low for the skills and experience you may need.

The solution is to take control over the panel selection. Require arbiters with a set minimum of experience in the subjects which you consider important for the agreement. This lets you select arbiters with qualifications you've reviewed and approved. If there are going to be three arbiters, after each party chooses one arbiter, I both arbiters jointly choose a third panel member with similar experience.

Also, put a sentence in your arbitration rules setting a fee that is high enough to attract experienced people. The arbiters most in demand command upwards of $125250 per hour. The combination of your selection input, the experience requirements, and the higher pay should produce quality arbiters with very relevant experience. Using highly experienced arbiters leads to quality decisions and less likelihood of continuing conflict.

Model Language:

Selection of First Two Arbiters:

Within ten days after delivery of written notice of the existence and nature of any dispute or disagreement the parties shall each appoint one lawyer actively engaged in the practice of AREA OF LAW in the state of STATE for a continuous period immediately preceding the date of delivery of the notice of dispute of not less than NUMBER OF years. Selection of Third Arbiter:

Within ten days after such appointment and notice, such lawyers shall appoint a third person (together with the first two lawyers, collectively, “Arbitration Panel”) who is either a lawyer of such qualification and background as the first two lawyers or a retired judge with not less than NUMBER OF years' continuous experience on the bench in the state of STATE ending not more than NUMBER OF years prior to the dispute date.

Discourage Stall Tactics in Choosing Arbiter

Under the AAA rules, if the parties agree to select their own arbitration panel but one of the parties doesn't pick someone by the selection deadline, the AAA will step in and select the unappointed arbiter. This tactic lets one party stall the arbitration process. The party may want more time to prepare, or it may be using arbitration for its threat value. Either way, time is wasted while the arbiter selection process is drawn out.

The solution is to say that if either party doesn't select a panel member within a set time frame, the delaying party will automatically lose the arbitration. This eliminates stall tactics.

Model Language:

In the event that any party fails to timely designate an arbiter, such dispute or disagreement shall automatically be deemed resolved against such party.

Set Deadline for Arbitration Process

The AAA rules do not limit the length of the arbitration process. If there is no deadline, a slow party or a slow arbitration panel can drag out the arbitration longer than is necessary. It can also defeat another plus of the arbitration process, economy. A longer process generally is a more expensive one. The meter runs every time the arbiters meet or study documents.

The solution is to set a maximum period for the arbiters to reach their decision; for instance, days from the panel's appointment. This will not only stop either party from stalling the arbitration, it will also let the arbiters know they have to act quickly and efficiently if they accept the appointment.

Model Language:

The members of the Arbitration Panel shall utilize their utmost skill and shall apply themselves diligently so as to hear and decide, by majority vote, the outcome and resolution of any dispute submitted to the Arbitration Panel as promptly as possible, but in any event on or before the expiration of NUMBER OF days after the appointment of the members of the Arbitration Panel.

Avoid Arbitration Where It Is Not The Best Solution

Under the AAA rules, all disagreements go through the arbitration process, unless the parties agree otherwise. But, in certain circumstances a party may be better off if certain kinds of disputes are resolved in court. Likewise, some remedies, like injunctions, are not suited to arbitration. For example in leases, some states offer owners an expedited court procedure when they are trying to get unpaid rent from tenants. Owners get scheduling priority and procedural shortcuts that are not available to tenants. This expedited process may be faster than arbitration, which undercuts one of the main reasons for using arbitration.

The solution is to exclude disputes that your state lets you resolve by procedures that are faster than arbitration or are illsuited to arbitration.

Get Needed Information Before Hearing

To prepare properly, you need to know as much as possible about your opponent's case. You can't afford to have important facts sprung on you for the first time at the hearing. The AAA rules don't require the parties to exchange arguments, facts, documents, or witness lists before the hearing.

The solution is to set out a schedule for exchanging documents, other evidence, and witness lists to be used at the arbitration hearing. The arbiters also should review this information before the hearing to decide if any of the material cannot be used. This schedule has three benefits: First, it gives you access to information about your opponent's case. Second, it lets you know up front if you will have a problem using any of your material. Third, it keeps the arbitration process moving smoothly and on schedule.

Model Language:

Two Weeks Before Hearing.

The parties shall file with the Arbitration Panel, and exchange among counsel two weeks before the arbitration hearing date, opening briefs and proposed witness lists including brief statements of the purpose for which each witness will be offered and copies of all proposed documentary evidence including brief statements of the purpose for which each document will be offered. At the same time, the parties shall provide the Arbitration Panel with a joint statement of any relevant facts upon which they are able to agree or a joint statement that there are no relevant facts upon which they are able to agree. No witnesses or documents may be used at hearing, except as disclosed in such lists, exhibits and statements, and only then to the extent not inconsistent with any applicable discovery responses. One Week Before Hearing.

The parties shall file with the Arbitration Panel and exchange among counsel one week before the hearing date, response briefs or a written statement that no response brief is being filed by any particular party. Three Days Before Hearing.

The Arbitration Panel shall deliver any appropriate witness or documentary rulings after the filing deadline for the response briefs and at least three days before the arbitration hearing date.

Avoid TimeConsuming Appeals

The AAA rules don't limit the loser's right to appeal the panel's decision. This can undermine one of the key arbitration goals. Appeals are notorious for dragging out lawsuits. They can do the same to an arbitration.

Neither party should be allowed to appeal the panel's decision unless it's claiming fraud or corruption by one of the arbiters. If the loser does appeal on these grounds, the arbiter's decision should be enforced until the appeal is decided. If the outcome is different from the arbitration results, the decision will be corrected. Some decisions may be difficult to undo, but erring on the side of the panel's decision is better than encouraging the losing party to cry fraud.

Model Language:

The decisions of the Arbitration Panel shall be final and binding and may not be appealed to any court of competent jurisdiction or otherwise except upon claim of fraud, corruption or knowing and willful failure to apply the provisions of this arbitration mechanism on the part of the Arbitration Panel, provided, however, that implementation of such decisions shall in no way be delayed or otherwise impaired pending the outcome of any such appeal.

Require Losing Party To Pay Legal Fees

Under the AAA rules, each party pays their own legal fees; the arbitration expenses are also divided equally between the parties. This setup encourages a party with a weak case to take a hard line and try arbitration rather than negotiate an amicable business solution. Each party's arbitration expenses are the same, whether it wins or loses.

Discourage frivolous complaints by requiring the loser to pay for everything, including both attorney's fees and all arbiters' fees for both sides. If there are several issues in the arbitration, the loser on each issue must pay the pro rated share of the costs for that issue.

Model Language:

The nonprevailing party on any issue arbitrated does hereby covenant and agree to promptly pay, and the Arbitration Panel shall be obliged to award to the prevailing party, 100% of all legal fees and costs incurred by the prevailing party for each issue. In addition, the nonprevailing party shall be required to pay 100% of the fees and costs of each of the arbiters for each issue. In cases where there is a split decision with each party prevailing on some but not all issues, the total legal fees and costs of both parties and total arbiters' fees and costs shall be added together and divided by the number of issues identified by the arbiters in the proceeding to arrive at a net figure owed by either party to the other for fees and costs.

Avoid Fee Calculation Disputes

The AAA rules do not regulate the amount of attorney fees. This may not matter much if the parties are paying their own fees, but it does matter a lot if the loser is footing the whole bill. The loser will probably complain that the fees are too high. Expect these complaints to waste a great deal of time and money.

The solution is to permit the winner to give an itemization of its attorney's fees to the arbitration panel. The panel will review the list to make sure the fees are not excessive, but the loser is not permitted to comment. Also, the agreement should say that neither attorney can charge a higher fee if it wins the arbitration than it would charge if it had lost.

Model Language:

Legal counsel for the prevailing party shall certify in writing to the Arbitration Panel (i) the total dollar amount of legal fees and costs, (ii) that such legal fees and costs were incurred in good faith and in keeping with the fee arrangements between the prevailing party and such counsel and (iii) that the payment of such legal fees and costs in full by the prevailing party was and is in no way contingent upon the outcome of the arbitration proceedings hereunder. Such certification shall be accompanied by a reasonably detailed itemization of the services rendered, the identity and vintage of the lawyer or lawyers who renders such services and the hourly rate or rates charged for such services and any other basis employed to arrive at such legal fees and costs. The Arbitration Panel shall decide the amount of fees and costs to be awarded to the prevailing party. Neither the nonprevailing party nor its counsel shall be permitted to argue or comment upon the amount of fees or costs to be awarded.

Using some or all of these ideas can go a long way to helping you make sure that only real disputes will ever get to arbitration. They will also help you ensure that once you are in arbitration you will have the benefit of a fast, cost effective process.