Crafting Powerful ADR Contract Clauses

Alternative Dispute Resolution (“ADR”) can be a cost-saving alternative to litigation. Here are practical tips for drafting strong ADR clauses for your agreements.

Parties can expect faster resolution and lower costs when using ADR to resolve their disputes. Quickly reaching a decision is often critical so that business planning can continue and long-term projects can proceed uninterrupted. According to statistics from one ADR provider, the average duration of a full-length commercial arbitration case from commencement to award is 14.5 months. The current median time from filing to trial in a civil case in U.S. district courts is 33.7 months.  This does not include the additional time the trial, getting a decision, and the possibility of an appeal may add to the process.

Arbitration facilitates faster resolution, with fewer steps and shorter deadlines. Most institutions offer expedited arbitration options which provide for shorter proceedings.

Speed and savings are not the only ADR benefits. Parties control the process, choosing neutrals with expertise and a convenient venue. ADR improves confidentiality for sensitive information and provides a final, binding resolution, with optional appellate review. It also offers logistical flexibility, enabling parties to proceed on their schedules and conduct virtual hearings.

So what can parties do to take advantage of these benefits? The key is drafting a strong ADR clause in their B2B contract. Arbitration agreements should consider the parties involved and their particular circumstances, so they can be tailored to best fit their needs.

The Necessary Elements

Every ADR clause begins with the essential elements, and the parties may then include additional optional elements as they see fit. An effective arbitration clause must do the following:

• Clearly and broadly define the disputes subject to arbitration.

• Commit the parties to arbitration.

• Choose an arbitral institution and its rules.

• Choose the seat of arbitration.

• Choose the language of the arbitration for international contracts.

The parties will want to define the disputes subject to arbitration. This is generally achieved with the broad statement “arising out of or relating to this contract,” followed by a commitment to arbitrate those types of disputes (“shall be finally resolved by arbitration”). However, the parties may also wish to include carve-outs (such as IP issues) that they wish to have adjudicated in court instead.

Parties should decide which arbitral institution and its rules. Parties should consider differences among institutions regarding administrative fee costs and staff responsiveness, as well as differences in institutional rules. Note that while most rules for domestic commercial arbitration are similar, they may differ on issues such as confidentiality, the default number of arbitrators appointed to a dispute and the method of their appointment; procedural time limits; discovery; and triggers for procedures such as mediation or truncated fast-track procedures.

Parties should consider the seat, language, and governing law for any disputes. The seat of arbitration is the place where the award is deemed to have been made. The governing law of an arbitration agreement is the law that will be applied to resolve any dispute arising from its validity, scope, or interpretation. It is good practice for to include a governing law provision in case problems arise. In the absence of a clause indicating the governing law of the arbitration, the law governing the seat of arbitration will apply. Parties contemplating international disputes may also wish to specify that English or another language shall be the language of the proceeding.

After including these necessary elements in an arbitration clause, parties seeking to use arbitration will need to consider whether to include additional components. Many additional elements are addressed by the arbitral rules specified in the ADR clause; however, parties should consider the types of disputes that may arise and whether the rules’ default provisions are sufficient or whether they want to customize the process.

Neutral Selection

Parties should consider including additional informationon the appointment of the arbitrator. The number of arbitrators may be specified in the ADR clause. Where disputes are likely to be high-value and complex, a tribunal of three arbitrators may be more appropriate. Since most arbitrations lack an appeal process, a three-person tribunal is generally considered a safer option because it is seen as more balanced and neutral, in part because it allows for diversity, reducing the risk of error.

A three-person tribunal can be costly and slower to reach a final resolution because of scheduling conflicts for hearings or deliberations. Over the course of the arbitration, three arbitrators may cost almost five times as much as a sole arbitrator. If the dispute is low-value and uncomplicated, a sole arbitrator will be a more cost-effective and efficient choice. Parties may specify a threshold amount or types of disputes that will have one or three arbitrators.

Parties may also wish to specify how arbitrators are appointed, or specific qualifications or expertise. It is prudent to not be too prescriptive since a complicated appointment process might greatly increase the time to appoint, and overly specific description of the qualifications may unreasonably narrow the pool of available arbitrators.

Settling or Partially Settling Before Arbitration

Parties can insert a provision mandating or suggesting negotiation or mediation prior to initiating arbitration. These clauses are called step clauses. Mediation or negotiation can be helpful to parties, as it can lead to an early settlement and help them save on costs. However, step clauses can also cause unnecessary delay, particularly if one side has no intention of settling. To mitigate potential drawbacks, drafters should include time limits on each step. Or they can include concurrent processes in which the mediation or negotiation proceeds in parallel with the arbitration.

These step clauses may provide off-ramps that allow the parties to avoid the time and costs they would otherwise devote to a full arbitration or litigation process. Negotiation between executives allows those in charge to have a frank discussion before the matter progresses. Mediation results in agreement about 70 percent of the time. Mediation agreements also have high compliance rates and can preserve business relationships and goodwill.

The flexibility of these processes allows the people involved to find the best path to agreement. Even if no settlement is reached, the parties can narrow the issues or resolve certain interests, shortening the arbitration.

Other Considerations

Arbitrability is a threshold inquiry, asking whether there is a valid agreement to arbitrate. Generally, questions of arbitrability are decided by the court, but parties to an arbitration agreement may agree to delegate them to the arbitrator. Under major US tribunal rules, the tribunal has the power to hear and determine challenges to its jurisdiction, including objections to the existence, validity, or scope of the arbitration agreement.

For the question of arbitrability to be delegated to the tribunal, there must be clear and unmistakable evidence indicating that the arbitrators must decide questions of arbitrability. Most courts have held that incorporating the institutional rules is sufficient. It may be best to include a delegation clause saying he arbitrator, and not the court, shall have primary responsibility to hear and determine challenges to the jurisdiction of the arbitrator.

Another detail is provisional relief. Most arbitral institutions’ rules expressly authorize arbitrators to issue interim measures to preserve the status quo or protect the parties' interests pending the outcome of the proceeding. Drafters can also address the need for provisional relief if they do not wish to rely upon those rules.

Parties may also wish to specify the type of award the arbitrator will issue. Institutional rules may designate whether a reasoned or a simple award is the default, and parties should understand which type is required under the rules. Parties might prefer a reasoned award, as the writing process allows the tribunal to carefully consider the evidence, arguments, and law, and it helps the parties better understand the award.

Some jurisdictions may require a reasoned award for enforcement. However, parties may also consider the time and cost of drafting the award, especially when three arbitrators are involved. Notably, a more detailed award does not increase the likelihood of a court challenge, as the very high threshold for overturning awards in court applies to both simple and detailed awards.

Most users of arbitration find the finality of an arbitration award appealing. However, some parties may be concerned about the possibility of an aberrant award and would like to appeal it. Many arbitral institutions have issued appellate procedures that allow parties to seek a modified or vacated award in specified circumstances. If parties wish to include an appellate process, it should be agreed to in the arbitration clause. Once the award is issued, parties will be unlikely to agree to an appeal, and it may even be too late, as most appellate processes require documents such as a transcript of the hearings that may not have been prepared.