News
Alternative Dispute Resolution
Aug. 14, 2002
Parties Should Make Arbitration Process Choices in the Contract
Focus Column - By Richard Chernick - Drafters of arbitration clauses are sometimes careless in identifying how the contemplated arbitration will be conducted when a dispute arises. The process that results from such a clause might not meet the parties' needs. A lack of care in drafting might even require expensive litigation to clarify the parties' rights or affect the outcome of the arbitration.
Focus Column
By Richard Chernick
Drafters of arbitration clauses are sometimes careless in identifying how the contemplated arbitration will be conducted when a dispute arises. The process that results from such a clause might not meet the parties' needs. A lack of care in drafting might even require expensive litigation to clarify the parties' rights or affect the outcome of the arbitration.
Arbitration of disputes arising in admiralty and interstate commerce is governed by the U.S. Arbitration Act, 9 U.S.C. Section 1 et seq. (commonly referred to as the Federal Arbitration Act or FAA). Allied Bruce-Terminix Cos. Inc. v. Dobson, 513 U.S. 265 (1995). The arbitration act, as a federal statute, is controlling in state and federal court; under the doctrine of pre-emption, courts must apply the arbitration act even in the face of a conflicting state statute. Doctor's Associates Inc. v. Casarotto, 517 U.S. 681 (1996).
The arbitration act does not address the actual conduct of an arbitration. Our state arbitration law, the California Arbitration Act, contains some provisions governing the conduct of arbitrations. Code of Civil Procedure Section 1280 et seq. When may this state law apply in view of the pre-emption doctrine? It obviously applies where the parties' dispute does not meet the Federal Arbitration Act definition of "commerce" contained in 9 U.S.C. Section 1.
It may also apply where the agreement has a California choice-of-law provision and it is determined that the parties' intended to apply both substantive and procedural state law. See Volt Info. Sciences Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468 (1989); Sovak v. Chugai Pharm. Co., 280 F.3d 1266 (2002).
Finally, state arbitration provisions may apply in tandem with the Federal Arbitration Act in some circumstances. See, e.g., Rosenthal v. Great Western Fin. Securities Corp., 14 Cal.4th 394 (1996) (where the Federal Arbitration Act is applicable, California's summary motion procedure for compelling arbitration may be applied by a state court rather than the Federal Arbitration Act's jury trial procedure because the state provision is not anti-arbitration).
Most parties choose to have their arbitrations administered by an arbitral institution, such as JAMS or the American Arbitration Association. Arbitration agreements calling for an administered arbitration process are self-executing. The process is begun in accordance with the institution's rules, usually by filing a demand for arbitration with the institution.
Nonadministered (ad hoc) arbitrations are really party-administered. Nonadministered arbitrations require a petition to compel arbitration if a party resists arbitration. Code of Civil Procedure Section 1281.2. A failure to agree on any essential aspect of a nonadministered process will probably require an additional trip to court, for example, to select an arbitrator. Code of Civil Procedure Section 1281.6. In an administered arbitration, such matters are controlled by the institution in accordance with its rules and administrative procedures.
When the arbitration clause specifies either a set of rules of an arbitral institution or designates an institution to administer their arbitration, the clause is interpreted to imply both choices (institution and rules). Rules of arbitral institutions usually state that the designation of a particular set of rules is taken as an implied agreement to have the referenced institution administer the process. See, e.g., JAMS Comprehensive Rules, Rule 1(b); AAA Commercial Arbitration Rules, Rule R-1; Maggio v. Windward Capital Mgmt. Co., 80 Cal.App.4th 1210 (2000).
Similarly, the designation of a particular institution gives that institution the authority to determine which of its rules will apply. For example, if JAMS is designated as the arbitral institution, it will apply its comprehensive, streamlined, employment or financial services arbitration rules, depending on the nature of the dispute and the amount in controversy. Similarly, the selection of the American Arbitration Association, without more, empowers the American Arbitration Association to determine which of its rules (commercial, employment, international, etc.) will govern the process.
The Federal Arbitration Act and California Arbitration Act apply to all arbitrations within their defined scope. See, e.g., Circuit City Stores Inc. v. Adams, 532 U.S. 105 (2001) (certain employment arbitration agreements not excluded by 9 U.S.C. Section 2). The parties may by agreement limit the effect of Federal Arbitration Act or California Arbitration Act provisions so long as no overriding policy is affected. E.g., Armendariz v. Foundation Health Psychcare Servs. Inc., 24 Cal.4th 83 (2000).
The choice of arbitral rules to govern the conduct of the arbitration may be stated expressly in the clause or may be incorporated in the clause by reference to a set of institutional rules. These arbitral rules supplement but do not supersede the Federal Arbitration Act or California Arbitration Act unless that intent is expressed or the rules are in direct conflict with a statutory provision. Cooper & Lybrand v. Superior Court, 212 Cal.App.3d 524 (1989).
For example, the parties may provide for discovery and exchange of information by express contractual provisions or may rely on the rules of the selected institution for those provisions. They may also reference the provision of the California Arbitration Act that provides for full discovery by agreement of the parties. Code of Civil Procedure Section 1283.1, 1283.05. If the parties agree on none of these alternatives, they still have the rights prescribed in the California Arbitration Act. See, e.g., Code of Civil Procedure Section 1282.2(a)(2), 1283.
Similarly, Code if Civil Procedure Section 1284.2 requires parties to an arbitration to share expenses of arbitration unless their agreement provides differently. If the parties have no cost-shifting provision, arbitral provider rules usually permit reallocation of such costs. See, e.g., JAMS Comprehensive Rule 24(f).
Because rules vary from institution to institution and even among different sets of rules within the same institution, it is important for the parties to make process choices by express language in the clause. For example, if the issue of prehearing discovery is important, the parties should know that the JAMS Comprehensive Rules provide for considerably greater discovery (e.g., Rule 17 (c)) than the American Arbitration Association commercial rules do. But the JAMS and American Arbitration Association employment rules prescribe certain discovery in accordance with prevailing law (e.g., Armendariz v. Foundation Health Psychcare Servs. Inc., 24 Cal.4th 83 (2000)) even in the absence of any contractual provision.
Both JAMS comprehensive rules (Rule 24(c)) and the American Arbitration Association commercial rules (Rule R-43) authorize the arbitrator to grant any remedy or relief that the arbitrator deems just and equitable within the scope of the agreement of the parties. This is consistent with the broad remedial authority accorded to arbitrators by courts. E.g., Advanced Micro Devices Inc. v. Intel Corp., 9 Cal.4th 362 (1994).
These rules are also generally interpreted to authorize an award of extracontractual or punitive damages. By contrast, the American Arbitration Association AAA international rules limit the power of the arbitrator to award punitive damages, unless the parties agree to permit it. Article 28, Paragraph 5.
JAMS recently amended all of its rules, effective Feb. 1; the new rules will apply to all cases begun after that date. All of JAMS rules are accessible on its Web page at www.jamsadr.com. Some of the new or clarified provisions in the comprehensive rules (intended to be applied in commercial disputes involving more than $250,000) of which clause drafters should be aware include the following:
• The new rules clarify the power of the arbitrator in several ways. The arbitrator is expressly given the power to determine arbitrability of disputes, including the scope, validity or enforceability of the arbitration agreement. Rule 11(c). Thus, reference to the JAMS comprehensive rules in the clause in effect makes this provision part of the parties' agreement. See First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995).
• The parties are expected to exchange all relevant information early in the case. Rule 17(a). The arbitrator has authority to order production of relevant documents, the identity of witnesses and the identity of documents intended to be relied on at the hearing. Rules 17, 20. The arbitrator is expressly given authority to resolve any disputes regarding the exchange of information. Rule 17(e).
• The arbitrator has power to conduct the process and manage the hearing in a way that will expedite resolution of the dispute. See Rule 16 (preliminary conference), Rule 22 (arbitration hearing). The arbitrator may bifurcate proceedings (Rule 22(b)) and may consider and determine dispositive motions (Rule 18). See Schlessinger v. Rosenfeld, Meyer & Sussman, 40 Cal.App.4th 1096 (1995).
• The rules give the arbitrator broad power to grant interim measures such as injunctive relief and measures for the protection and preservation of property. The arbitrator may order security for costs associated with such measures as appropriate. These measures may be embodied in an interim award. Rule 24(e).
• The arbitrator has power to issue interim awards or orders for other purposes as well. Rule 24(d). Interim and final awards shall be reasoned unless the parties agree to the contrary. Rule 24(g). Arbitrators retain jurisdiction to correct clerical, computational, typographic or other errors in final awards. Rule 24(i).
• JAMS has a unique optional arbitration appeal procedure (Rule 34) by which the parties may agree that the award (typically rendered by a sole arbitrator) will be reviewed by a panel of three "appellate" arbitrators. The award as corrected then becomes the award that is subject to court review. This procedure is an alternate to a panel of three neutral arbitrators and can provide assurance that the award will be legally correct.
• The parties also may stipulate to a bracketed (high-low) or final offer ("baseball") format for the arbitration award. Rules 32, 33.
Richard Chernick is an arbitrator and mediator and is managing director of the JAMS arbitration practice. He is a co-author of The Rutter Group's "California Practice Guide - Alternative Dispute Resolution."
By Richard Chernick
Drafters of arbitration clauses are sometimes careless in identifying how the contemplated arbitration will be conducted when a dispute arises. The process that results from such a clause might not meet the parties' needs. A lack of care in drafting might even require expensive litigation to clarify the parties' rights or affect the outcome of the arbitration.
Arbitration of disputes arising in admiralty and interstate commerce is governed by the U.S. Arbitration Act, 9 U.S.C. Section 1 et seq. (commonly referred to as the Federal Arbitration Act or FAA). Allied Bruce-Terminix Cos. Inc. v. Dobson, 513 U.S. 265 (1995). The arbitration act, as a federal statute, is controlling in state and federal court; under the doctrine of pre-emption, courts must apply the arbitration act even in the face of a conflicting state statute. Doctor's Associates Inc. v. Casarotto, 517 U.S. 681 (1996).
The arbitration act does not address the actual conduct of an arbitration. Our state arbitration law, the California Arbitration Act, contains some provisions governing the conduct of arbitrations. Code of Civil Procedure Section 1280 et seq. When may this state law apply in view of the pre-emption doctrine? It obviously applies where the parties' dispute does not meet the Federal Arbitration Act definition of "commerce" contained in 9 U.S.C. Section 1.
It may also apply where the agreement has a California choice-of-law provision and it is determined that the parties' intended to apply both substantive and procedural state law. See Volt Info. Sciences Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468 (1989); Sovak v. Chugai Pharm. Co., 280 F.3d 1266 (2002).
Finally, state arbitration provisions may apply in tandem with the Federal Arbitration Act in some circumstances. See, e.g., Rosenthal v. Great Western Fin. Securities Corp., 14 Cal.4th 394 (1996) (where the Federal Arbitration Act is applicable, California's summary motion procedure for compelling arbitration may be applied by a state court rather than the Federal Arbitration Act's jury trial procedure because the state provision is not anti-arbitration).
Most parties choose to have their arbitrations administered by an arbitral institution, such as JAMS or the American Arbitration Association. Arbitration agreements calling for an administered arbitration process are self-executing. The process is begun in accordance with the institution's rules, usually by filing a demand for arbitration with the institution.
Nonadministered (ad hoc) arbitrations are really party-administered. Nonadministered arbitrations require a petition to compel arbitration if a party resists arbitration. Code of Civil Procedure Section 1281.2. A failure to agree on any essential aspect of a nonadministered process will probably require an additional trip to court, for example, to select an arbitrator. Code of Civil Procedure Section 1281.6. In an administered arbitration, such matters are controlled by the institution in accordance with its rules and administrative procedures.
When the arbitration clause specifies either a set of rules of an arbitral institution or designates an institution to administer their arbitration, the clause is interpreted to imply both choices (institution and rules). Rules of arbitral institutions usually state that the designation of a particular set of rules is taken as an implied agreement to have the referenced institution administer the process. See, e.g., JAMS Comprehensive Rules, Rule 1(b); AAA Commercial Arbitration Rules, Rule R-1; Maggio v. Windward Capital Mgmt. Co., 80 Cal.App.4th 1210 (2000).
Similarly, the designation of a particular institution gives that institution the authority to determine which of its rules will apply. For example, if JAMS is designated as the arbitral institution, it will apply its comprehensive, streamlined, employment or financial services arbitration rules, depending on the nature of the dispute and the amount in controversy. Similarly, the selection of the American Arbitration Association, without more, empowers the American Arbitration Association to determine which of its rules (commercial, employment, international, etc.) will govern the process.
The Federal Arbitration Act and California Arbitration Act apply to all arbitrations within their defined scope. See, e.g., Circuit City Stores Inc. v. Adams, 532 U.S. 105 (2001) (certain employment arbitration agreements not excluded by 9 U.S.C. Section 2). The parties may by agreement limit the effect of Federal Arbitration Act or California Arbitration Act provisions so long as no overriding policy is affected. E.g., Armendariz v. Foundation Health Psychcare Servs. Inc., 24 Cal.4th 83 (2000).
The choice of arbitral rules to govern the conduct of the arbitration may be stated expressly in the clause or may be incorporated in the clause by reference to a set of institutional rules. These arbitral rules supplement but do not supersede the Federal Arbitration Act or California Arbitration Act unless that intent is expressed or the rules are in direct conflict with a statutory provision. Cooper & Lybrand v. Superior Court, 212 Cal.App.3d 524 (1989).
For example, the parties may provide for discovery and exchange of information by express contractual provisions or may rely on the rules of the selected institution for those provisions. They may also reference the provision of the California Arbitration Act that provides for full discovery by agreement of the parties. Code of Civil Procedure Section 1283.1, 1283.05. If the parties agree on none of these alternatives, they still have the rights prescribed in the California Arbitration Act. See, e.g., Code of Civil Procedure Section 1282.2(a)(2), 1283.
Similarly, Code if Civil Procedure Section 1284.2 requires parties to an arbitration to share expenses of arbitration unless their agreement provides differently. If the parties have no cost-shifting provision, arbitral provider rules usually permit reallocation of such costs. See, e.g., JAMS Comprehensive Rule 24(f).
Because rules vary from institution to institution and even among different sets of rules within the same institution, it is important for the parties to make process choices by express language in the clause. For example, if the issue of prehearing discovery is important, the parties should know that the JAMS Comprehensive Rules provide for considerably greater discovery (e.g., Rule 17 (c)) than the American Arbitration Association commercial rules do. But the JAMS and American Arbitration Association employment rules prescribe certain discovery in accordance with prevailing law (e.g., Armendariz v. Foundation Health Psychcare Servs. Inc., 24 Cal.4th 83 (2000)) even in the absence of any contractual provision.
Both JAMS comprehensive rules (Rule 24(c)) and the American Arbitration Association commercial rules (Rule R-43) authorize the arbitrator to grant any remedy or relief that the arbitrator deems just and equitable within the scope of the agreement of the parties. This is consistent with the broad remedial authority accorded to arbitrators by courts. E.g., Advanced Micro Devices Inc. v. Intel Corp., 9 Cal.4th 362 (1994).
These rules are also generally interpreted to authorize an award of extracontractual or punitive damages. By contrast, the American Arbitration Association AAA international rules limit the power of the arbitrator to award punitive damages, unless the parties agree to permit it. Article 28, Paragraph 5.
JAMS recently amended all of its rules, effective Feb. 1; the new rules will apply to all cases begun after that date. All of JAMS rules are accessible on its Web page at www.jamsadr.com. Some of the new or clarified provisions in the comprehensive rules (intended to be applied in commercial disputes involving more than $250,000) of which clause drafters should be aware include the following:
• The new rules clarify the power of the arbitrator in several ways. The arbitrator is expressly given the power to determine arbitrability of disputes, including the scope, validity or enforceability of the arbitration agreement. Rule 11(c). Thus, reference to the JAMS comprehensive rules in the clause in effect makes this provision part of the parties' agreement. See First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995).
• The parties are expected to exchange all relevant information early in the case. Rule 17(a). The arbitrator has authority to order production of relevant documents, the identity of witnesses and the identity of documents intended to be relied on at the hearing. Rules 17, 20. The arbitrator is expressly given authority to resolve any disputes regarding the exchange of information. Rule 17(e).
• The arbitrator has power to conduct the process and manage the hearing in a way that will expedite resolution of the dispute. See Rule 16 (preliminary conference), Rule 22 (arbitration hearing). The arbitrator may bifurcate proceedings (Rule 22(b)) and may consider and determine dispositive motions (Rule 18). See Schlessinger v. Rosenfeld, Meyer & Sussman, 40 Cal.App.4th 1096 (1995).
• The rules give the arbitrator broad power to grant interim measures such as injunctive relief and measures for the protection and preservation of property. The arbitrator may order security for costs associated with such measures as appropriate. These measures may be embodied in an interim award. Rule 24(e).
• The arbitrator has power to issue interim awards or orders for other purposes as well. Rule 24(d). Interim and final awards shall be reasoned unless the parties agree to the contrary. Rule 24(g). Arbitrators retain jurisdiction to correct clerical, computational, typographic or other errors in final awards. Rule 24(i).
• JAMS has a unique optional arbitration appeal procedure (Rule 34) by which the parties may agree that the award (typically rendered by a sole arbitrator) will be reviewed by a panel of three "appellate" arbitrators. The award as corrected then becomes the award that is subject to court review. This procedure is an alternate to a panel of three neutral arbitrators and can provide assurance that the award will be legally correct.
• The parties also may stipulate to a bracketed (high-low) or final offer ("baseball") format for the arbitration award. Rules 32, 33.
Richard Chernick is an arbitrator and mediator and is managing director of the JAMS arbitration practice. He is a co-author of The Rutter Group's "California Practice Guide - Alternative Dispute Resolution."
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