Introduction
The last two segments of this Small Business B-2-B Arbitration series have focused on certain key structural aspects of pre-dispute arbitration agreements. Perhaps some might think that an examination of even the most basic structural components of arbitration agreements is too much information for a business person, but most successful business people know about all relevant aspects of the contracts they negotiate, not just the basic structural components of those contracts (e.g., price and performance terms).
Given that an arbitration agreement can fundamentally alter the risk-benefit calculus of a deal, one would naturally expect that successful business people would be familiar with at least the basic structural aspects of such agreements, but in our experience that is not necessarily the case. In fact, were it so, we would expect there would be far fewer arbitration-related disputes that could be traced back to a party’s un- or ill-informed decision about whether to agree to arbitrate, and if so, on what terms.
In Part II.B.2(A) we identified three key structural aspects of pre-dispute arbitration agreements and discussed the first—the scope of disputes to be arbitrated—in some detail. This Part II.B.2(B) briefly discusses the second: how an arbitration under the agreement will be administered and by whom.
Ad Hoc versus Administered Arbitration
Both pre-dispute and post-dispute arbitration agreements can be either ad hoc or administered. An administered arbitration agreement is one by which the parties agree to have an arbitration provider – such as, for example, the American Arbitration Association (the “AAA”) or JAMS – administer the arbitration, including disseminating arbitration demands and other notices; scheduling; administering arbitrator selection; and resolving or aiding the resolution of certain types of disputes concerning arbitration-rule compliance; providing hearing facilities; and otherwise administering, or assisting with the administration of, the proceedings. Most or all arbitration providers also have one or more sets of arbitration rules, including ethical guidelines and arbitrator selection procedures, and typically feature stables of arbitrators who have met certain eligibility criteria set by the provider. Naturally, the arbitration provider charges fees for its services, as do the arbitrators themselves.
Generally, if the parties wish to use an arbitration provider, they so specify in their agreement, and identify the provider. If the provider’s rules so state, simply agreeing to arbitrate pursuant to them may be deemed consent to use the provider. (See, e.g., AAA Commercial Rules, R-2.) Parties sometimes specify more than one provider and a method for agreeing how the provider will be selected in the event of a dispute, or provide for an alternative provider in the event the other provider becomes unavailable, as happened when the National Arbitration Forum ceased handling consumer arbitration cases in response to a (now settled) law suit brought by Minnesota’s attorney general in 2009.[1]
There are certain advantages and disadvantages inherent in administered arbitration. Advantages can include the provider handling the administrative aspects of the arbitration and the existence of a comprehensive set of arbitration rules governing arbitration procedures, including selection of arbitrators, which generally can be supplemented or modified to at least some extent by the arbitration agreement.
Assuming one’s arbitration needs are somewhat generic, using an arbitration provider might be the right choice, provided you take the time to consider whether the provider’s rules and procedures are likely to facilitate the arbitration experience you desire, and that you give some serious thought and consideration to whether one particular arbitration provider is more likely than another to help you realize your dispute resolution goals. This is simply commonsense: serious boating and fishing enthusiasts, for example, may obtain certain things needed for those pursuits at the local Walmart for competitive prices; other, more specialized, items may need to be purchased from a marine or fishing-tackle provider. The same can be true for arbitration providers.
Disadvantages associated with arbitration providers can include added costs that might be reduced if the user has the requisite knowledge, experience—and, in some cases—the resources, to devise and implement an arbitration system or format that meets the needs of a particular contract or type of contract. Or it may be that the provider’s rules and procedures are believed not likely to be the best for the types of disputes that are likely to arise. If the disadvantages, or potential disadvantages, outweigh the advantages, or potential advantages, then ad hoc arbitration may be the better choice.
Ad hoc arbitration is arbitration administered by the arbitrators and the parties. The parties specify whatever procedures are necessary to submit a dispute to arbitration (including arbitrator selection and qualification rules) and any other procedures and rules they wish to include or incorporate by reference into their agreement. The arbitrators interpret and apply the parties’ arbitration rules, filling in gaps when necessary with their own procedural rulings or directives. Ad hoc arbitration is particularly common in specialized-industry arbitration, but is or can be used in any situation where the parties do not wish to use an arbitrator provider (whether for economic or other reasons).
Advantages of ad hoc arbitration include the ability to control, and in many cases reduce, costs; draw from arbitrator-candidate pools that might be better suited to the subject-matter of an arbitration than a provider pool; devise and implement a dispute resolution format designed to suit the needs of a particular contract or a class of contracts, whether it be simple or, out of necessity, fairly complex; and, perhaps, provide greater assurance of informality and privacy. But achieving these potential advantages may be more important in some situations than others, doing so may require a fair amount of expertise and commitment, and in certain situations using a provider may be as good a solution, or even a better one.
Parties can, to a certain extent, attempt to achieve the best of both worlds and agree to a form of arbitration that is administered by an arbitration provider, but subject to a modified version of the provider’s rules. To do so, the parties have to ensure that their modifications comply with the provisions of the providers’ rules concerning modifications, or else the provider could, in theory at least, refuse to administer the arbitration.
Coming soon will be Part II.B.2(C), which will wrap up our discussion of structure by examining a topic that is at least as important as the scope of the agreement: who the decision makers will be. Subsequent posts shall discuss the risks and benefits of arbitration, and making informed decisions about whether to agree to it, and if so, on what terms.
Links to Previous Segments of this Multi-Part Small Business B-2-B Arbitration Post:
Links to Future Segments:
[1] See, e.g., Green v. U.S. Cash Advance Illinois, LLC, 724 F.3d 787, 789 (7th Cir. 2013) ( “The National Arbitration Forum has not been accepting new consumer cases for arbitration since July 2009, when it settled a suit by Minnesota’s Attorney General, who believed that the Forum was biased in merchants’ favor.”).
Tags: Ad Hoc Arbitration, Administered Arbitration, American Arbitration Association, Arbitration-Providers, B-2-B Arbitration, JAMS
