How detailed should your arbitration clause be?
In this episode of the Contract Teardown show, guest Diana Isyanova shares three possible approaches. She argues that the relationship between the parties should dictate options, then the parties themselves should make informed choices. Watch to see how three transactions handled alternative dispute resolution options.
Ebook referenced:
https://www.lawinsider.com/resources/guides-and-checklists/is-your-arbitration-clause-complete
Contracts referenced:
https://www.lawinsider.com/contracts/fvyBpBmUAYl
https://www.lawinsider.com/contracts/4gVJk8JwbBw
https://www.lawinsider.com/contracts/83j3ldVHEgC
LinkedIn profile:
https://www.linkedin.com/in/diana-isyanova-a4382077/
THE GUEST: Diana Isyanova is a business transactions attorney with an exceptional ability to think outside the box. She practices law in the State of California and is a member of the Orange County Bar Association and the OCBA Young Lawyers Division.
THE HOST: Mike Whelan is the author of Lawyer Forward: Finding Your Place in the Future of Law and host of the Lawyer Forward community. Learn more about his work for attorneys at www.lawyerforward.com.
If you are interested in being a guest on Contract Teardown, please email us at community@lawinsider.com.
Episode Links
The Contracts:
https://www.lawinsider.com/contracts/fvyBpBmUAYl
https://www.lawinsider.com/contracts/4gVJk8JwbBw
https://www.lawinsider.com/contracts/83j3ldVHEgC
Guest’s Links: LinkedIn
Interview Transcript
Mike Whelan In this episode, Diana Isynova brings us three examples of arbitration clauses. So let’s tear it down. Diana Isyanova, welcome back to the Contract Teardown show. How are you today?
Diana Isyanova Very well, thank you. It’s good to be working.
Mike Whelan Right after the Christmas break. Today is December 27th. We have many pictures, adorable pictures of puppies, and kids opening and presents. My house is a mess. We’ve had to return stuff. But I wanted to prioritize having this conversation with you because you have released an e-book about arbitration for Law Insider. So what we want to do today is talk a little bit about that, about arbitration. I’m going to share with the folks at home a few agreements. You brought us three samples. Tell us about these different arbitration clauses. What is this? Where are we going to see an arbitration clause in our work?
Diana Isyanova Sure. Just to give you a big picture. Arbitration is a form of alternative dispute resolution or ADR that is used to resolve conflicts without going to court. Arbitration is generally considered to be more private than litigation and less formal. Also, many consider arbitration to be a less expensive and quicker option than litigation. But this is not necessarily the rule and it is not that uncommon anymore for arbitration costs to become as high or even higher than litigation costs. Disputes subject to arbitration are resolved by one or more impartial arbitrators, and their decisions are legally binding and enforceable in courts. For the parties to have mandatory arbitration, it has to be explicitly stated in the parties contract. In other words, an individual cannot be forced to submit a dispute to arbitration without consenting to it beforehand in the contract. And that’s important because this is the choice the contracting parties have to make before any type of conflict is even evident. Additionally, the arbitrator’s powers can also be determined by an agreement. What arbitrators can or cannot decide can also be spelled out in the contract, and therefore the drafters of the arbitration provision or an agreement play a significant role in identifying the parties, needs, their bargaining powers, their resources, and eventually drafting a suitable provision.
Mike Whelan Yeah, that’s right. And we’re actually bringing these three samples because, I mean, this stuff covers the gamut. I’ve signed contracts that are three pages long that’ll have an arbitration clause of three sentences. You know, whether those are enforceable or not isn’t probably the drafters point. But in our case, we want to draft enforceable arbitration agreements. So we are bringing to the folks at home three examples. Let’s start with the first one. This one comes from a company called RenovoRx, and it’s a pretty expansive clause. It’s pretty long. It’s got quite a bit going on. Take me down to I believe it’s down in section 13 arbitration of all disputes, it’s titled. By agreeing to this arbitration procedure, both consultant and client waive the right to resolve any such disputes through a trial by jury or judge or through an administrative proceeding. It’s got that all in bold, and then it’s got quite a bit of details in there about what the arbitrator can do, about the capacity, about the process. Tell me about this approach that they’re using in this really expansive. What do you think of it?
Diana Isyanova Well, I chose this sample for a good reason. I like the layout. It’s clear; it’s broken down into sections. Each section is clearly labeled so the reader can point, figure out what the section is about and if the reader needs to find it, it’s easy to do so. Section 13 The whole section addresses arbitration. 13.1 is a waiver of the right to a jury trial. And since this is a waiver of a constitutional right, the language must be absolutely must be conspicuous and unambiguous. And this is why the last sentence in 13.1 is all caps and bolded so the reader cannot miss it. The next subsection is 13.2, gives the exclusive authority to the arbitrator to determine any procedural questions that grow out of disputes. And this is the point I made earlier, that parties can decide what arbitrators can and cannot do during the procedure. Then this subsection 13.3 specifies that all claims must be brought in an individual capacity, meaning there can be no joined or class actions under this agreement. And it takes further, by limiting the arbitrator, arbitrators’ powers by disallowing the arbitrator to consolidate claims from different individuals. So it takes away the powers from the contracting party as well as the arbitrator himself or herself. The next subsection is 13.4 addresses the arbitration procedure. These are the nuts and bolts of the proceedings themselves, how it’s going to go. And the parties clearly agree to a single arbitrator and the drafter should consult the client what it entails and what type of consequences it may lead to. Interestingly, the procedure also prescribes the use of streamlined rules of the arbitral organization jams in this instance. And typically the streamlined rules apply to disputed claim or counterclaim, not exceeding $250,000. And that’s not including interest and attorney’s fees. However, if an agreement explicitly states that the streamlined rules to apply to any type of dispute, 250,000 less or more, that rule is inapplicable and the parties can use the streamlined, quicker, faster, easier or less formal procedures to resolve any type of dispute.
Mike Whelan Yeah, it looks like in 13.5 it gives this carve out for the that I think they’re required to do actually, if I’m not mistaken. Arbitration bodies, arbitrator bodies can’t do injunctive relief and final word so they have this carve out to allow state and federal courts to jump into these situations to protect. You had mentioned in preparation things like protected intellectual property, things like that, avoid the spoliation of evidence, that kind of thing. But what I’m seeing in this document is a hammer. Right. I mean, they’re they’re just hitting people upside the head with this arbitration clause. And we’ve had conversations before on this show where companies have even said at the beginning of the contract before getting into the body of any of the contract, hey, man, jump down to 13 because we’re going to have an arbitration bid in there. You better pay attention to it. The big question that I keep seeing as we tackle these arbitration clauses then, is how do you make this explicit? How do you make it so clear to people that this is what’s happening? And you brought to us another sample in the second sample: this is from an executive employment agreement, and they made this arbitration section explicit by separating it out entirely. It is Exhibit D, It’s incorporated by reference. Tell me about this arbitration agreement. I’m seeing a lot of the same kind of stuff in here as the first one, but noticing that it stands out as a separate document, What’s the purpose if you’re a drafter in making it a separate document? Are you trying to make it easily editable later? Are you trying to make it so it’s more explicit to the person who’s reviewing it? Why have a separate?
Diana Isyanova A separate document is usually most appropriate when the parties want or need to describe in detail and at length, hence a separate document. All of the major aspects of dispute resolution from the moment a notification of the existence of a dispute is sent out to the final decision of the arbitrator. This is common in complex transactions or when the agreement has been already signed and the parties decided to add arbitration as a venue to resolve their issues. That’s also an option. But this is where the more technical level comes in. When we are speaking, we’re addressing drafters. For the drafters, this is where the more technical level comes in, as the drafter has to think through the procedural part of the procedure as well as the substantive part. For example, the drafter must consider the issues themselves to be arbitrated. The nature of the issues, the complexity of the issues must be discussed, the penalties for time loss, perhaps which tribunal will hear the matter, which organization, and the number of arbitrators, either a single arbitrator or a panel of three or five. Also, perhaps it’s worth specifying that the arbitrators must have any specific qualifications or subject matter expertise. Do the parties appoint or let the ADR organization to assign a neutral? What law will apply to the proceedings? It also may detail and specify what type of relief the arbitrators will and will not be empowered to award; whether the award will be final and binding, which is typically the case, but not necessarily. And also who will be liable for the costs of arbitrations. As I mentioned before, the cost can be really, really high. So it’s important to know ahead of time who will be covering those costs.
Mike Whelan Yeah, and I see in this I mean, this is related to an employment agreement. And so you mentioned constitutional rights. I mean, once you’re dealing with employment, you start to get to an even higher level of protection. I notice in section nine of this that again, we’re seeing the all caps. This is a waiver by both parties of the constitutional right, but they go even more hit you upside the head. There’s a Section 12 voluntary agreement, all caps. You know, you’ve read the agreement, you know the terms. You know, get over it. If you don’t understand, you better bring this up beforehand. But jumping back to the text of it, to your point about the substantive nature of it, this one seems to give a lot of power to the arbitrator. Under 3.3, it says the arbitrator shall have exclusive authority underlined to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this agreement, including but not limited to any claim that all or any part of this agreement is void or voidable. It still, as we mentioned before. Allows for summary judgment filings with the arbitrator. The arbitrator can resolve some or all of the asserted claims through such a motion. This one seems to give a lot of power to the arbitrator, maybe more than the first one. What do you think about that? Is this language communicating that to you more power to the arbitrator, or do you think this is appropriate for an employment relationship?
Diana Isyanova Yes. And to your point, I agree that this agreement definitely seems to give more power to the arbitrator to decide. And for example, Section 3.4 addresses an option for the parties to submit a motion for summary judgment, which potentially may speed up the resolution of the dispute and reduce the overall costs. But at the same time, it gives so much more power to the arbitrator to decide based on the written statement who is right and who’s wrong, sort of.
Mike Whelan Yeah. I really want to jump to this last example that you brought, because it’s super interesting to me, because it’s not just about arbitration, it’s about alternative dispute resolution kind of writ large. This gives a process of going through negotiation, the mediation and arbitration. If I look at this sample, it starts with the intent of the parties. We’re trying to be nice to each other who we’re trying to resolve what they call, without limitation, any disagreement, controversy, claim or cause of action between the parties arising out of this agreement. So if you look in this section, it starts with a Section two negotiation and then it leads in three to mediation and then in four to final and binding arbitration. And I think and correct me if I’m wrong, it states the intent is to go ahead and get through good faith negotiation. Meaning I think I see this as steps. Are you reading it that way? Can you go straight to arbitration in this agreement? Do you like the way that they’re sort of leading you through? No, you need to negotiate first and then mediate, then arbitrate. Or do you think this might be just prolonging a process that you could get done quicker if you just went back to the summary judgment? But the arbitrator, what do you think of this approach of having a tiered system?
Diana Isyanova Yeah, and this is exactly why I chose this example, because this is a good example of what’s called a multi-tiered or escalation dispute resolution procedure. And this approach typically includes a period of negotiation and or mediation before submitting to dispute to arbitrate and the dispute to arbitration. And this approach may be beneficial for the parties who wish to preserve ongoing commercial relationships as it requires, or rather permits the participants to pursue some form of non-binding ADR mechanism as mediation or negotiation before embarking on the binding mechanism of arbitration. This could be very beneficial. Again, one does not suit all. You have to realize the relationship between the parties. And if, let’s say, if it’s two businesses who have been working together for years and years and are planning to continue their business relationship, this could be a good option for them. But on the flip side, a multi-tier approach can delay, as you mentioned, the final resolution of the dispute. And would that increase the costs for the parties and increase the frustration. And it could not be a good option for some parties.
Mike Whelan Yeah, especially if you’re trying not to have disproportionate costs. I mean, because often the two parties aren’t equally situated in a deal. And so, you know, the viability of these clauses, the enforceability seems to really depend on is this unduly burdensome before we part ways with this document, I want to lead you to a couple of sections and get your take on it under B, under the arbitration section in number four. Under B, it says no discovery shall be permitted absent a showing of good cause. Any discovery granted by the arbitrators should be limited to that necessary to protect the minimum due process rights of the parties. This is interesting to me because, you know, I mean, as you well know, a lot of the cost around litigation is show me your emails from the past 40 years so I can see if there was something way back, you know, and there’s kids in basements reading through documents trying to draw that yellow highlighter. A lot of the inefficiencies that we’ve identified in litigation relate to discovery. What do you think of this section about arbitration without discovery, good thing, bad thing, or are you potentially signing away your ability to chase causes of action that you might have had if you had discovery? What do you think about the sort of the risk tradeoff with this discovery limitation?
Diana Isyanova Potentially? Definitely. But you’re also potentially saving yourself a lot of headache and expenses. In any arbitration procedure, there’s always consideration of evidentially scope. Would you want your client to be able to provide more evidence so when compared to litigation, arbitration may also allow for a broader presentation of evidence and arbitrator may allow more evidence and testimony and documents to be heard than a judge would allow in court if it’s stated in the agreement and if both of the parties agree to that. On the other hand, there is a possibility of lower level of disclosure as we see here, and the parties may not be allowed to gather as much information about the dispute as compared to typical litigation. Let’s say. And that’s a very valid point and a very important decision for the parties to make when they’re signing the contract.
Mike Whelan Yeah, I think it’s interesting. It relates back to the beginning of this particular document where they say our intention is to keep working together, Right. We want this to work out. So we’re going in. And why would we go digging into each other’s emails from 40 years ago if our long term intention is to work it out? If I jump down to another interesting limit, no party may raise new claims against the other party in the arbitration, not raised in the mediation. So it goes back to that process. It says the arbitrator shall have the power to resolve all disputes between the parties. The arbitrator shall not have the power to award treble, punitive or exemplary damages, which again, I think is legislated. I don’t think they’re allowed to do that. But the parties hereby waive their right to receive treble punitive or exemplary damages to the extent permitted by law. Again, I would look locally to see that, but as a drafting exercise, again, it seems to route back in the we’re trying to kick you to the process. We’re not trying to just drive you to arbitration, but I want to bring you back and ask again to underline as we think big picture the purpose of an arbitration clause. I think if I’m reading you right, the purpose is really dependent upon the relationship and the nature of the deal. If this is you’re buying something on Amazon. Amazon has a bajillion, you know, transactions every day. They’re putting arbitration on there because they want to be done right. They put the arbitration in there so we can just get out of this difficulty and just move on. If you’re a future customer, if you’re not, great, we don’t care. We just can’t take the mass of claims that would be against us. On the other end of the spectrum, you have this kind of agreement where it’s no, we’re we’re kind of on equal footing. We got a big deal going on. Both of us really take a hit if we don’t keep this deal going. But we know as with any good marriage, there’s going to be disagreements about who takes the trash out. So we want to have quick resolution of those things. But our fundamental purpose is not to kick the dispute to the curb. Our fundamental purpose is to keep the relationship going. So just in closing, tell us, big picture a bit about your e-book that you wrote for Law Insider that we’re going to give a link to over in the show notes. But also just how you think about making these decisions rooted in the nature of the relationship rather than just saying, hey, arbitration clauses should always look like X. How does the relationship lead that decision making?
Diana Isyanova Well, I think the big portion of that burden is on the drafter to decide really, how do you drive this clause or an agreement for these given parties? Again, I always believe that every agreement has to be tailored to a particular transaction, to particular parties to the transaction, because one does not suit all. It has to be precisely for the right relationship between the parties, for the right amount of money, because it’s if the damage is stated, the let’s say liquidated damages stated in the agreement are so disproportionate, first of all, the clause might be not enforceable. And second of all, if it is enforceable, then it could be extremely burdensome for one of the parties who is at fault, let’s say. So it’s very, very important for the drafter to decide what should be proposed for the parties to consider. And once that’s done, then the burden shifts to the parties to actually read and try their best to understand what they’re signing. They oftentimes, parties believe, rely on somebody else’s word without sitting down and trying to understand what they’re signing. And this is very unfortunate. It can be very costly for them.
Mike Whelan Yeah. And you mentioned that as we’ve talked about, you’ve done an e-book for Law Insider that really revolves around some of these decisions that we’re making with arbitration clauses. What should be in there, what shouldn’t be. Again, with the heavy caveat that you really need to consider the particular transaction to your point. I want to send people over to that. If you go to lawinsider.com/resources and you look in the guides and checklists, you’re going to see Diana’s e-book there. Diana, for people who want to reach out to you, connect with you, learn more about how you use these clauses in the deals that you’re getting done for your clients. What’s the best way to connect with you by email?
Diana Isyanova My email it’s diana@isyanovalaw or or via my website app. www.isyanovalaw.com. The final note I wanted to make about the e-book that it goes into the details for the five must have components for drafters that a lot of people might find useful. And ADR as a procedure in general is a very effective and very efficient tool and should not be taken lightly.
Mike Whelan Very good. All right. Definitely. Go learn those five tips. Go over to lawinsider.com/resources will have Diana’s information on there to reach out to her And also a link, like I said, back over to this e-book, if any of you watching wants to be on this show on the Contract Teardown and beat up documents as we do. Just e-mail us, we’re at community@lawinsider.com; we’d be happy to have you. Good luck to all of you in the new year as you write these difficult contracts and these arbitration clauses. Diana. Thanks for being here. We’ll see you all next time. Thanks.
Diana Isyanova Thank you, Mike.