• Avoiding or Minimizing Pre-Arbitration Litigation
  • February 7, 2008 | Author: James J. Sentner
  • Law Firm: Gardere Wynne Sewell LLP - Houston Office
  • It is extremely frustrating, if not embarrassing, for transaction counsel to recommend arbitration as an economic alternative to litigation and then find when a dispute arises it takes months, if not years, of litigation to compel the opposing party to proceed with arbitration. Such litigation frequently arises over the following issues:

    1. Is there an arbitration agreement?
    2. Does the arbitration agreement cover the particular dispute?
    3. Did the party signing the arbitration agreement have authority or legal capacity to do so?
    4. Do the arbitrators have jurisdiction over the dispute?
    5. Can the arbitration agreement be vitiated for fraud, duress, or misrepresentation?
    6. Is there a precondition to arbitration that has not been met?

    In addition, litigation can arise because

    1. One party refuses to appoint its arbitrator
    2. The two appointed arbitrators cannot agree on a third acceptable to the parties.

    Litigation over these issues can be avoided by careful drafting of the arbitration agreement.  We will put forth suggested wording to keep the dispute out of the courts.

    USE A BROAD FORM ARBITRATION AGREEMENT:

    While all arbitral bodies offer suggested arbitration clauses that are broad form, they do not provide the kind of detail that is required to cut off pre-arbitration litigation.  Items 1, 2 and 3 above can be kept out of court by granting the arbitrators power to determine those issues.  Language such as: “All claims, disputes, or controversies arising out of, or related to this Agreement, including but not limited to it's validity, scope making, interpretation, enforceability, performance, breach or any challenge to the authority, or capacity of any person signing this Agreement shall be determined by binding arbitration ….”

    STIPULATE THE JURISDICTION OF THE ARBITRATORS

    The question of the competence of the arbitrators to determine their jurisdiction is dealt within the rules of most major arbitral bodies which grant such power to the arbitrators.  However, there is disagreement among the courts in the United States regarding the effectiveness of incorporation of these rules by merely stipulating the arbitration will be administered by an arbitral body under its rules.  The majority rule is that the parties are free to grant such power to arbitrators but the mere statement that the arbitration will be conducted in accordance with the rules of an arbitral body is not sufficient to empower the arbitrators to determine their own jurisdiction.  The court’s have required a clear and unequivocal grant of power by the parties in their agreement.

    A suggested clause is: “The making, validity, scope, interpretation and enforceability of this Agreement, including, but not limited to, who shall be parties to the arbitration, and what issues have been submitted to arbitration shall be determined by the arbitrators chosen in accordance with this Agreement.” 

    STIPULATE THE POWER OF ARBITRATORS TO DETERMINE VALIDITY OF THE ARBITRATION CLAUSE

    When a party attempts to vitiate its agreement to arbitrate on the grounds of fraud, duress or undue influence, the courts require evidence that the arbitration agreement itself and not just the entire contract was procured by fraud, duress or undue influence.  This is a particularly heavy burden and such a challenge can generally be disposed of in summary proceedings.  However, if there is a concern that an opposing contracting party may, in the event of a dispute, attempt to escape arbitration on one of these grounds, the following language can be employed to provide a parol evidence defense:

    “The parties acknowledge that this Agreement to arbitrate has been entered into with the assistance of counsel of each party’s choice and without any fraud, duress, or undue influence.”

    KEEP ARBITRATION AND MEDIATION INDEPENDENT

    It has become common to contractually provide for mediation and arbitration as consecutive methods of dispute resolution.  However, in doing so, it must be kept in mind that arbitration agreements are enforceable by statutory and treaty mandate.  Mediation, on the other hand (unless court ordered), is strictly consensual. The only way to enforce a contract to mediate is a suit for specific performance which will probably not succeed. If such a suit is successful, a recalcitrant opponent is unlikely to reach a mediated settlement. Therefore, in drafting an agreement calling for mediation and then arbitration, language must be carefully considered in order to avoid an interpretation by the courts that mediation is a condition precedent to arbitration.  If such an interpretation is possible, the arbitration clause may be practically unenforceable.  It is also suggested that the mediation provision be drafted so that if one party refuses to mediate within a stipulated time, the matter can, at the option of the other party, proceed directly to arbitration.  Language that should avoid this issue is as follows: “In the event mediation does not take place or is not successful within 30 days of a demand for mediation, either party may serve a demand for arbitration and proceed as set forth below.”

    It may be more effective to move matters forward to provide that during the 30 day mediation period the parties will complete the nomination of arbitrators.  This allows for mediation, but the arbitration is not delayed in the event of an unsuccessful mediation.

    MAKE APPOINTMENT OF ARBITRATORS SELF EXECUTING

    Once a matter has been referred to arbitration, the Court’s are reluctant to intervene to move the arbitration process along.  It is therefore important to make sure the appointment of arbitrators will be completed even if one party tries to obstruct the process by continual delay in nomination of an arbitrator or in agreeing to a nominated third arbitrator.  This can be accomplished by providing:

    Sole Arbitrator: “In the absence of agreement between the parties on appointment of an arbitrator within 15 days of service of a demand for arbitration, the sole arbitrator shall be appointed by the [arbitral body].

    Three Arbitrators: “ In the event any party fails to name an arbitrator within 15 days of the service of a demand for arbitration, the party making a nomination may proceed before the arbitrator nominated and that arbitrator is empowered to render interim and a final award binding upon all parties to this Agreement.  Should the two appointed arbitrators be unable to agree on a third arbitrator within 15 days of their nomination, the third arbitrator shall be appointed by the [arbitral body].”

    While the foregoing may not resolve all obstructionist tactics used to thwart arbitration and avoid per-arbitration litigation, they will go a long way toward that end.