The Dispute Resolution Clause

Parties normally execute a written agreement that governs most aspects of the arbitration process.   Arbitration clauses can be a single sentence or can include a detailed protocol for dispute resolution.  Below is a checklist of topics to be considered:

1. Written agreement to arbitrate; affects parties and joinder, consolidation.
2. Scope of contract issues covered; usually broad.
3. Site of arbitration; location of parties, subject of contract, neutral third country.
4. Arbitration rules; administered versus ad hoc.
5. Provisional remedies; injunctive relief jurisdiction, venue.
6. Language; English, other.
7. Arbitrators; number, appointment, qualifications, neutrality of party-selected.
8. Final, enforceable (FAA, Uniform Arbitration Act, New York Convention for international); limited judicial review.
9. Consumer arbitration; FINRA, employment, unconscionability, class actions, congressional legislation.
10. Mediation/conciliation, other procedures.
11. Choice of law; substantive law of contract, CISG.
12. Choice of forum; dispute resolution, arbitral/judicial venue.

Because of the private nature of arbitration, the contents of this dispute resolution clause will determine the rights and privileges, along with the procedure for any future disputes arising from the contract.  Without careful drafting, a party’s position may be significantly disadvantaged.

After the Arbitral Award: Appeal, Modification and Third-Party Issues

After the case is presented, the arbitrators decide the matter. The tribunal renders a final, binding award. An arbitral award may be "bare" or "reasoned." An award is bare when it simply identifies the prevailing party and the amount of the award. A reasoned award is more complete, discussing the rationale and evidence supporting the award.⁷

Appealing either type of arbitral award is difficult, controversial and disfavored. The use of an appellate mechanism or remedy undermines the central advantages of speed, finality and the reduced costs often associated with arbitration. Appealing an award is discouraged even by administrative arbitral institutions. These institutions may provide for an alternative to judicial review through an Arbitral Appellate Procedure.⁸ The U.S. Supreme Court recently held businesses cannot contract for court review beyond that provided by statute, remanding the case for further proceedings in the trial court.⁹

The losing party can appeal. The appellant must initiate court action, seeking to "vacate" the award, or the prevailing party may petition for enforcement of the arbitral award. In the United States, however, the power to vacate an arbitral award is sharply narrowed by statute and case law.¹⁰

Under Section 10 the Federal Arbitration Act, for example, an arbitral award may be vacated only for very limited reasons, including: arbitrator bias ("evident partiality") or showing the award was procured by fraud, corruption or undue means.¹¹ The common law adds additional grounds for reversing arbitral awards, including: (1) manifest disregard for the law; (2) an irrational, arbitrary or capricious award; (3) or violations of public policy. The federal circuit courts apply these grounds with some variations.¹²

In any court, however, a mistake of law or fact is not sufficient to set aside an arbitral award.¹³ The "clearly erroneous" standards applicable in civil disputes do not apply to arbitration awards. Therefore, a significant advantage to arbitration is that an arbitrator's award is more "final" than a trial verdict on the merits.

Moreover, another advantage is that a private arbitral award does not generally determine the legal rights or obligations of a third-party. Arbitrations usually determine only the rights and obligations of the arbitrating parties. In contrast, a court judgment may have third-party implications. Such a judgment may have preclusive res judicata or collateral estoppel effect, or may simply be a public precedent leading to additional litigation.

Enforcement of Arbitral Awards

In resolving commercial disputes, the enforceability of an arbitral award is an enormous advantage. In contrast court judgments, which depend on enforcing a bilateral treaty between the forum state and the state where the assets are located, arbitral awards enjoy nearly universal, world-wide enforcement through national courts. (The U. S. has recently ratified the Hague Convention on Choice of Court Agreements, which allows contracting parties to designate the court systems of state parties to the Convention through a choice of court clause. It will be some time, however, before enough countries ratify this Convention for it to be a significant practical alternative to nearly universally-enforceable agreements to arbitrate.)

Longstanding multilateral treaties render foreign arbitral awards enforceable in the United States, as well as signatory countries around the world. The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention") renders arbitral awards enforceable in signatory states.¹⁴ Presently, including the United States, 142 countries are parties to the New York Convention.¹⁵ The Inter-American Convention on Commercial Arbitration ("Panama Convention") applies, similarly, in South and Central America.¹⁶

To enforce an arbitral award, the party either applies to the court specified by the parties or the place where the award was entered. The court's judgment on the award is enforced like any other final court judgment.

Under the New York Convention, however, there are seven exclusive grounds for refusing enforcement of arbitral awards rendered in foreign jurisdictions: incapacity, inadequate notice, award beyond the scope, composition of arbitral authority, award not yet binding, subject matter not arbitrable, or the award is against public policy.¹⁷

Prior to the New York Convention, parties had difficulty enforcing arbitral awards outside the country where the arbitration occurred. Many foreign tribunals were reluctant to recognize arbitral awards rendered against their own nationals. Such legal protectionism and perceived local favoritism foreign businesses unwilling to voluntarily submit to national court proceedings or arbitrations out of their home jurisdictions.

In contrast, the world-wide enforcement of arbitral awards encourages stability and predictability in commercial relationships. In turn, this facilitates the negotiation of international contracts based on the understanding that any dispute will be resolved with finality by a panel of experienced arbitrators selected by the parties. This predictability and control, rather than the uncertainty or perceived bias associated with local courts, is a powerful business advantage.

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7 Under a "high-low" or "bracketed" agreement, the parties may limit the arbitrator's ability to award an amount in a specified range. back
8 See, e.g. CPR http://www.cpradr.org/ClausesRules/ArbitrationAppealProcedure/tabid/79/Default.aspx (discussing CPR Arbitration Appeal Procedure, which operates outside the court system).back
9 Hall Street Associates, L.L.C. v. Mattel' Inc., 128 S.Ct. 1396 (2008).back
10 See. First Options Chicago v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995) (citing Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182,98 L.Ed. 168 (1953) (parties bound by arbitrator's decision not in "manifest disregard" of the law), overruled on other grounds, Rodriguez de Ouijas v. Shearson/American Express, Inc" 490 back
11 Title 9 U.S.C. § 10 (a)(1), et seq. back
12 See, e.g.. Thomas E Carbonneau, The Law and Practice of Arbitration, 368-386 (Juris Publishing, Second Edition, 2007). back
13 B.L. Harbert Intern., LLC v. Hercules Steel Co., 441 F.3d 905 (1lth Cir. 2006) (citing Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456, 1461 (11th Cir. 1997) (arbitrators cannot be reversed for errors or misinterpretations of law). back
14 Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention"), June 10, 1958, entered into force June 7,1959,21 U.S.T. 2517, T.I.A.S. 6997, 330 UN.T.S. 3 implementing legislation codified at Title 9 U.S.C.§§ 201-208. back
15 See http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html. back
16 See, e.g., Inter-American Convention on Commercial Arbitration ("Panama Convention"), Title 9 U.S.C. § 301 (approved in 1975). back
17 See Title 9 U.S.c. § 20 I (Article v); for cases discussing grounds for not enforcing foreign arbitral awards under NY Convention, see Yusuf Ahmed Alghanim & Sons v. Toys "R" Us, Inc., 126 F.3d 15,19 (2d Cir. 1997); also, First State Insurance Co. v. Banco de Seguras del Estado, 254 F.3d 354 (1st. Cir. 2001) (confirming awards under NY Convention); Industrial Risk Insurers v. MAN. Gutehoffnungshutte GmbH, 141 F.3d 1434 (11th Cir. 1998) (affirming arbitral award and rejecting policy and procedural arguments). back