By Martin C. Weisman
In recent years Alternative Dispute Resolution processes have been increasingly used both privately and by the courts. In the past, many advocates have turned aside from arbitration because of their belief that the arbitration process was neither cost nor time efficient. Many thought that arbitrators “cut the baby” when rendering decisions and did not make decisions based upon the proofs and law presented. However, with the increase focus on ADR by the courts, specifically the business courts, and the recognition by ADR providers that the arbitration process needed to be cost effective as well as efficient, the landscape of arbitration and its arbitrators have materially changed. You now need to be ready to take advantage of it by fashioning an effective arbitration clause in your contracts.
The American Arbitration Association amended its commercial rules in October 2013 providing the arbitrator with an array of powers to manage the process. The Michigan legislature adopted the Revised Uniform Arbitration Act (MCLA 691.1681 et seq.) which also increased the efficiency of arbitration, and preserved much of the cost effectiveness of arbitration by empowering arbitrators to manage the process without fear of reversal. With this occurring it becomes even more important for contract drafters to incorporate an effective arbitration provision as part of their agreements in order to take full advantage of this newly improved process. Arbitration awards are final, binding and enforceable. Court intervention in the arbitral process has generally been limited by state and federal laws and by doing so, by default, arbitrators have the power to resolve disputes speedily and with cost savings. The arbitration process also allows the parties to control the selection of their arbitrator in order to get a decision maker who has the background and expertise relevant to their specific dispute(s). During an arbitration court room rules of evidence are not strictly enforced, discovery is limited, and the rules by which the arbitration is to be conducted flexible.
As a result, attention should be given to drafting and including arbitration clauses in most contracts. Some of the typical arbitration provisions to be considered include identifying the number of arbitrators, the method of selection, the arbitrators’ qualifications, whether or not or to what extent discovery will be permitted, the duration of the arbitral proceedings, what remedies can be utilized by the arbitrator including assessment of fees, costs and expenses, and the type of award which will be required. The following is a discussion of some of these clauses for your consideration.
Number, Method, and Quality of Arbitrators
Typically disputes are heard by a single arbitrator unless the dispute is significant or involves large sums of money, in which case three arbitrators are often used. The parties sometime feel more comfortable with three arbitrators because it provides a greater comfort level regarding the decision making process. However, appointing three arbitrators significantly increases the cost of arbitration as well as the time it takes to conduct an arbitration. It would be my recommendation that a sole arbitrator be appointed even for disputes which currently would be heard by three arbitrators. However, with one arbitrator more care should be taken in terms of the qualifications and the method of selecting that arbitrator. Arbitrators are also often selected through a party appointed process in which each side designates an arbitrator and those arbitrators then select the third arbitrator to act as the chair or the neutral. You can modify this selection process by having the two appointed arbitrators select the neutral, and then, have this neutral act as the sole arbitrator. The parties can also designate selection of an arbitrator from an ADR provider like PREMi. PREMi can provide a list of qualified arbitrators from which the selection be made. It is important that any arbitration clause provide the parties with the ability to also require a certain type of experience. For example, it can be said that the arbitrator have topic specific expertise in whatever business or type of business is involved. You might want to state that the arbitrator be an attorney or a CPA with at least ten or more years of experience, or you can describe the background that appears best suited for that particular dispute. However, be mindful of the fact that if you provide very specific qualifications in the arbitration clause it may decrease the number of arbitrators that might be available from which you can chose. However, minimum qualifications of a general nature are always helpful. In summary you should draft an arbitration clause that provides guidelines for the number, method of selection, and qualifications of your arbitrator(s).
Arbitration Procedures
Arbitration clauses can also devise a discovery regiment. Discovery is one of the most expensive and time consuming attributes of any litigation process and it is desirable in an arbitration to control the amount and the scope of discovery. The arbitration clause in a contract can provide that structure. Certainly the parties and arbitrator can, by agreement, structure the process. However it is better to spell the procedure out in the contract leading up the dispute. Under the Revised Uniform Arbitration Act and the American Arbitration Association rules the arbitrator has the power to limit or allow discovery. Arbitration clauses can also limit or provide the number of depositions and/or type of discovery allowed or not allowed. Disputes less than a certain dollar amount may only require document exchanges and the arbitration clause may even waive an oral hearing with the matter determined based upon written submissions only. Some of these tools are typically used in smaller dollar value cases. Additionally, the arbitration clause can provide that there be no direct testimony and that testimony can be submitted by way of affidavit with the witness provided for cross examination and rebuttal. This process significantly decreases the time involved and costs of the arbitration process.
Because arbitration is designed to provide a speedy method of dispute resolution, some contracts specify a time period within which the arbitration must be concluded. It is not unrealistic to place a 90, 120 or 180 date deadline for the completion of an arbitration in your contract. However, a shorter timeline might be aggressive for a factually intensive multi-million dollar dispute. A clause which indicates that time is of the essence and that the hearing shall take place within 120 days of filing with a decision rendered within 180 days is a common provision dealing with these types of issues.
Remedies
It is important to include in an arbitration clause the remedies an arbitrator may grant. Normally we see language similar to “any remedy or relief that the arbitrator deems just and equitable”. However, contracting parties may want to expand or exclude certain remedies such as awarding consequential or punitive damages, equitable relief or injunctions. An arbitrator who has been granted direction in the arbitration clause will result in a decision that is less likely to be challenged. Similarly, fee shifting provisions should be built into any standard arbitration clause. This will allow the arbitrator to award reasonable fees and costs to the prevailing party or, to make an award if it was reasonable and just under the circumstances of the case. There are also several types of awards that arbitrators are called upon to make. They include a standard award, a reasoned award, or findings of facts and conclusions of law. Each of those have pluses and minuses. A standard award is merely the statement of the result by the arbitrator with no explanation. Such an award is very difficult to reverse, since the arbitrator has great discretion and there is no statement as to how or why the arbitrator reached that decision. From an arbitrator’s standpoint that it the most favored approach. A reasoned award or opinion is one in which the arbitrator explains how the award was arrived at. This type of award provides the general reasons for the decision. A reasoned award can add cost to the arbitration process and may require additional time to complete. Finding of facts or conclusion of law are the most detailed award requiring the arbitrator to spend a significant amount time in reciting the facts the arbitrator relied on and the legal conclusions these facts result in. This clearly adds costs and delay and, in many cases, provides grounds to challenge the confirmation of the award. As result, it is the least favored approach of arbitrators. However, each type of award has different value to the parties in an arbitration. A standard award does not give any guidance as to how the decision was arrived. While it may give comfort that there will be no appeal, it may also be disturbing that there is no ability to appeal if you believe an arbitrator has “run amok”. A reasoned award increases the possibility of a challenge on confirmation and some additional costs and delay, but, it may provide a little more comfort to those involved as to the whys and wherefores of the decision. Findings of fact and conclusions of law is the type of award which, unless the case has an extremely large dollar value and/or is very complicated, is not preferred and can lead to the continuation of the dispute beyond the arbitration in the courts.
General Provisions
Sometimes the parties may fight over where an arbitration shall take place and therefore to the extent possible the arbitration clause should clearly identify the city, state and county where the arbitration is to take place. The clause should also provide what state’s laws will govern the arbitration. The contract provision should also reaffirm the fact that the neither a party nor an arbitrator may disclose the existence, content or result of any arbitration without the prior written consent of all parties. This reinforces what is built into the Revised Uniform Arbitration Act, the Michigan Court Rules, and the American Arbitration Rules.
Miscellaneous Items
Sometimes a party may fail to pay its required share for an arbitrator’s compensation or administrative charges. In that case, what happens? One suggestion would be that the arbitration clause provide that failure to pay would constitute a waiver to present evidence or cross examine witnesses at the arbitration hearing. Under the current American Arbitration’s rules the non-paying party’s share may be paid by the opposing party and included as part of the ultimate award. It may not, however, be appropriate to include that type of language in the arbitration clause because it would only give incentive to one or the other not to pay.
Finally, the American Arbitration Association has developed optional appellant arbitration rules. These rules provide that an award can be appealed to an optional review panel through a special procedure that the American Arbitration Association has developed. Such an appeal is not available to the parties unless there is language in the agreement that permits such a process.
Conclusion
A well drafted and constructed arbitration clause can provide clear protections for the parties and a roadmap for the arbitrator for the conduct of the arbitration. Such a clause will also result in the process being much more economical, efficient, final and binding, and result in an effective dispute resolution tool.
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Martin C. Weisman is recognized as a Michigan “Super Lawyer” and Michigan “dBusiness Top Lawyer” with more than 45 years of experience in the areas of alternative dispute resolution, banking, finance, partnership and shareholder issues, real estate and construction matters and general commerce contract disputes. He has served as a neutral, court or party appointed arbitrator, mediator and/or case evaluator in hundreds of commercial matters. He has received numerous hours in mediation and arbitration training and is an ADR trainer. Weisman was the co-founder and former chairman of the State Bar of Michigan Real Property Law Section ADR Committee, a member of the State Bar of Michigan ADR Section Council and is currently its chair elect, a member of Professional Resolution Experts of Michigan LLC (PREMi), a member of the American Arbitration Association Panel of Neutral Arbitrators for Complex Commercial Disputes, and a member of the American Arbitration Association Panel of Mediators for Commercial Disputes and is recognized by the National Academy of Distinguished Neutrals . Weisman has written and lectured on topics such as alternative dispute resolution, shareholder/partnership disputes, trial practice, real estate and banking matters, and professional negligence issues.
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