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Source: Los Angeles Daily Journal Extra (In Closing)
Date: September 16, 2002
While there are many advantages to contractual arbitration, perhaps its chief attraction is the flexibility it offers the parties to shape the process. This is an opportunity not to be taken lightly, since failure to exercise care in drafting the arbitration agreement - or exercising it in a thoughtless manner - may well result in an inappropriate dispute resolution process with unpredictable results and unnecessary expense.

Additional opportunities to reshape an inherited arbitration clause, by joint stipulation, occur before the arbitration begins or after the arbitrator has been appointed (that is, pre-hearing conference).

Below are specific ways parties can shape their arbitration process to meet their particular needs and objectives.

Scope of Arbitration

What is the scope of issues that should be subject to arbitration? Contract claims only? Tort claims? What about statutory claims or other causes of action?

A broad-form arbitration clause - "All claims or disputes arising out of or related to this agreement or the breach thereof ... will be submitted to binding arbitration" - sweeps in both contract and tort claims and often statutory claims.

Including more-limiting language or omitting the phrase "or related to" may limit its scope to contract claims only. Compare, Fleet Tire Serv. of North Little Rock v. Oliver Rubber Co., 118 F3d 619 (8th Cir. 1997); Tracer Research Corp. v. National Environmental Servs. Co., 42 F3d 1292, 1295 (9th Cir. 1994).

Consolidation/Joinder of Parties

Another threshold issue is the parties to be covered by the arbitration agreement. For example, considering collateral parties, such as guarantors, who likely would be beneficial to an effective arbitration is necessary. If such parties are necessary or desired, considering what additional steps need to be taken to assure their presence in the arbitration is wise.

Similarly, where multiple parties are involved in a project or a series of related transactions (for example, a construction project), parties and counsel should consider whether disputes between them should be consolidated into a single arbitration.

Arbitration Administration

A critical decision is the issue of who administers, the arbitration. The initial choice is between an institutional provider and a nonadministered arbitration. The former, which involves specifying an experienced provider such as JAMS or AAA, imports contractually into the process a well-developed, defined set of institutional rules addressing such issues as arbitrator selection, discovery and the arbitration hearing itself. The latter choice creates a process without such rules and leaves those issues to be governed by statute or the parties' ability to agree on process choices after a dispute has arisen between them.

One of the most important ramifications of the choice between an institutional provider and a nonadministered arbitration is the issue of who decides issues such as arbitrability. Does the arbitrator have the power to make such decisions, or must the parties go back to court each time such an issue is raised?

Unless the parties have agreed otherwise, the courts must make such decisions. First Options of Chicago v. Kaplan, 514 U.S. 938 (1995). This can result in a cumbersome, time-consuming arbitration process that frustrates the parties' intentions in agreeing to arbitrate in the first place.

However, both the JAMS Comprehensive Arbitration Rules and the AAA Commercial Rules vest in the arbitrator the power to rule on those issues, thus obviating the need to file a court action to determine the scope of and to enforce the parties agreement to arbitrate.

Finally, on the choice of administration issue, consider that JAMS Comprehensive Arbitration Rule 24(c) requires the arbitrator, unless the parties specify a different standard, to "be guided by principles of law and equity as applied to the facts," a standard not statutorily mandated in California.

Given the deference afforded arbitrator's awards under state law (Moncharsch v. Heily & Blasé, 3 Cal.4th 1 (1992)), parties may well wish to impose on the arbitrator the duty to use his or her best efforts to follow the law.

Selecting the Appropriate Arbitrator(s)

One major reason parties opt to arbitrate is to have some say in how the person who will decide their dispute is to be selected. The drafter of the arbitration clause can have a great deal of influence over this issue.

Discovery/Exchange of Information

Exchange of information is another area to which attention must be paid as a part of the drafting process. Parties often assume that the broad discovery available to them under the California Civil Discovery Act will be available to them in arbitration. That is not necessarily the case.

With regard to documents, specific statutes call for exchange of documents in certain types of cases (for example, Code of Civil Procedure Sections 1282.2; 1283.1), but no broad statutory authority calls for such an exchange. The JAMS and AAA rules do, however, provide for document exchange.

An area of common confusion is discovery depositions. Many parties and counsel assume an arbitrator has unlimited authority to order discovery depositions. The law is to the contrary. Under neither the California Arbitration Act nor the Federal Arbitration Act do parties have the right to deposition discovery absent agreement of the parties, and the arbitrator has no power to order otherwise. See Code of Civil Procedure Sections 1283.1(b), 1283.05; McRae v. Superior Court, 221 CA2d 166, 172 (1963).

Selection of an institutional provider in the arbitration clause may or may not cause the right to deposition discovery to spring into existence. The JAMS Comprehensive Arbitration Rules give each side the right to take one deposition and additional ones at the arbitrator's discretion.

The AAA Commercial Rules have no similar provision, but their Construction Rules give arbitrators in large cases (more than $1 million), with a showing of good cause, the discretion to order discovery depositions.

The point: Be sure to read carefully the applicable rules of the institutional providers concerning the amount of discovery they may or may not provide.

The above guide is not intended to be exhaustive. Counsel also should consider such issues as clause enforceability, provisional remedies and efficiencies at the arbitration hearing. However, the bottom line is the arbitration process offers parties and their counsel the opportunity to craft a dispute resolution vehicle uniquely suited to their needs. To take advantage of that opportunity requires careful thought and attention to a whole host of issues, beginning with the drafting of the arbitration clause itself and continuing through the conclusion of the hearing.

John M. Seitman, Esq is a resolution expert with JAMS in Southern California and has more than 30 years of experience in ADR. He has arbitrated or mediated hundreds of cases in a variety of areas including complex business, intellectual property and employment.

Copyright 2002 Daily Journal Corporation. Reprinted with permission.