Generally, a party in litigation is constrained to follow the applicable State or Federal Rules of Civil Procedure as they navigate through each stage of the case. One of the perks of arbitration (in addition to the commonly perceived perks of expediency and value) is a party’s ability to establish the rules and procedures that will apply to an arbitration proceeding.
The right or obligation to participate in arbitration is usually based upon the existence of an arbitration agreement in which one or both of the parties expressly agree to pursue any claims in arbitration, rather than litigation. Accordingly, arbitration agreements are simply contracts between the parties. As a result, parties are commonly allowed, through contractual agreement, to vary the rules and procedures that will apply to the arbitration proceeding. For instance, the American Arbitration Association (“AAA”) Commercial Arbitration Rules and Mediation Procedures (hereinafter the “AAA Rules”) expressly provide that “[t]he parties, by written agreement, may vary the procedures set forth in” the AAA Rules. See AAA Rules, R-1(a), Agreement of Parties.
Consequently, when drafting an arbitration clause in a contract, the drafter should consider the needs and interests of the client and adjust the applicable rules and procedures to best fit the particular client’s needs. For instance, some of the options subject to consideration and inclusion in an arbitration agreement include, but are not limited to, the following:
- Location of Arbitration: The AAA Rules provide that “[t]he parties may mutually agree on the locale where the arbitration is to be held.” AAA Rules, R-11, Fixing of Locale.
- Selection of Arbitrator: The AAA Rules allow the parties’ arbitration agreement to specifically name an arbitrator or specify the method to be followed in selecting an arbitrator. AAA Rules, R-13, Direct Appointment by a Party.
- Number of Arbitrators: Under the AAA Rules, the default rule is that a dispute will be heard by only one (1) arbitrator. However, the parties are permitted to determine the number of arbitrators to hear the dispute provided the number is specified in the arbitration agreement between the parties.
- Confidentiality: The parties can contractually agree that arbitration proceedings and/or awards shall remain confidential. See, g., Parilla v. IAP Worldwide Servs. VI, Inc., 368 F.3d 269, 280 (3d Cir. 2004); see also AAA Employment Arbitration Rules, R. 23. Although it should be noted that some courts have held confidentiality provisions in arbitration agreements to be unconscionable. See, e.g., Pokorny v. Quixtar, 601 F.3d 987, 1002 (9th Cir. 2010) (finding a confidentiality provision that prohibited the parties from disclosing the substance of their claim, the content of any testimony or other evidence presented at an arbitration, or the terms of any arbitration award unconscionable because it handicapped plaintiffs’ ability to investigate while allowing the employer to learn how to better arbitrate future claims).
- Punitive Damages: Some jurisdictions even permit parties to waive punitive damages awards in arbitration proceedings. See, e.g., New S. Fed. Sav. Bank v. Anding, 414 F. Supp. 2d 636, 650 (S.D. Miss. 2005) (holding that prohibition of state common law punitive damages in arbitration agreement is enforceable); Investment Partners, L.P. v. Glamour Shots Licensing, Inc., 298 F.3d 314, 317-18 (5th Cir. 2002) (upholding arbitration agreement with general prohibition of punitive damages). Gatlin, 848 So. 2d at 854 (Cobb, J., dissenting)(“I am not willing to interpret our Legislature as having established a public policy, favoring punitive damages, of such force as to negate private parties’ efforts to mutually waive the opportunity to seek such damages from each other.”).
- Mediation: A contract may require that, if a dispute arises between the parties, “the parties agree first to try in good faith to settle the dispute by mediation … before resorting to arbitration, litigation, or some other dispute resolution procedure.” See AAA Rules, Mediation, p. 8).
So the next time you draft an arbitration provision, considering tailoring the applicable rules and procedures to best fit the particular client’s needs.