Should your business agree to arbitrate under arbitration provider rules? Well, that depends.
Ideally, you should review those rules to see what they say, and discuss them with a knowledgeable and experienced arbitration attorney, or perhaps with another businessperson who has meaningful experience arbitrating under them. If, after doing your due diligence, you’re satisfied with the rules, understand how they might materially affect your arbitration experience, and are prepared to accept the consequences, then you may want to agree. If not, then you need to consider other options.
Granted, most of us do not bother to review arbitration rules before agreeing to arbitrate, or even to consult briefly with someone who is familiar with how they work in practice. And that can lead to some surprises, some of which may be unpleasant.
Here’s a nonexclusive list of a few things to keep in mind when considering whether to agree to arbitrate under arbitration provider rules:
- Agreeing to arbitrate under arbitration rules generally makes those rules part of your agreement, which means they are binding on you like any other part of your arbitration agreement;
- Arbitration provider rules generally provide that “arbitrability” issues—i.e., issues about the validity, enforceability, or scope of the arbitration agreement—must be decided by the arbitrator, not the court;
- They will govern not only the procedures to be used in the arbitration, but key substantive issues, such as arbitrator selection, arbitrator qualifications, and the number of arbitrators;
- They may empower the arbitration provider to resolve, at least in the first instance, questions about arbitrator impartiality, questions that one would otherwise reasonably expect were within the exclusive province of a court;
- They may determine whether your arbitration is placed on an expedited or complex-case track; and
- They may contain information about arbitration provider fees, which may be steeper than you anticipated.
And this list is by no means comprehensive.
Do any of these things really matter in business arbitration? They do, and to take but a single example, let’s look at how agreeing to provider rules may result in your business forefeiting its right to have a court decide disputes about the validity, enforceability, or scope of the arbitration agreement.
Arbitration Provider Rules May Require Arbitration of Disputes About Your Arbitration Agreement
Arbitration provider rules often require that parties arbitrate disputes about the arbitration agreement, such as whether a particular issue must be arbitrated or even whether an arbitration agreement is valid or otherwise enforceable.
According to settled arbitration law, parties agree to arbitrate such issues—known as “arbitrability issues” or “questions of arbitrability”—only where they have “clearly and unmistakably” agreed to do that. In other words, the law presumes that the parties did not agree to arbitrate those issues, leaving them to a court to decide. (See here, here, here, and here.)
Consider this “standard” arbitration clause recommended by the American Arbitration Association, one of the leading arbitration providers in the U.S.:
Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures (the “AAA Commercial Rules”) 8 (2013) (emphasis added).
If you agreed to a contract containing the above arbitration clause did you “clearly and unmistakably” agree to arbitrate disputes about your arbitration agreement?
Most U.S. Circuirt Courts of Appeal in the U.S. have said the answer is “yes.” They hold that such an arbitration agreement constitutes a clear and unmistakable agreement to arbitrate disputes about validity, enforceability, or scope of the arbitration agreement, provided that the incorporated arbitration rules (here, the AAA Commercial Rules) clearly and unmistakably require the parties to arbitrate such “arbitrability questions.”
Rule 7(a) of the AAA Commercial Rules clearly and unmistakably provides that the arbitrators are empowered to decide arbitrability issues:
The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.
AAA Commercial Rules R-7(a).
The court decisions requiring parties to arbitrate arbitrability do not turn on whether a party read the incorporated arbitration-provider rules or otherwise understood the consequences of agreeing to them. That’s just a reality of basic contract law: parties to a contract are ordinarily bound by the contracts they sign, even if they did not read or understand them. Unless you can demonstrate unconscionability relating specifically to the agreement to arbitrate arbitrability, or can show that no agreement to arbitrate under provider rules was ever formed, then you’re pretty much out of luck.
So let’s say your business agreed to a contract containing an agreement to arbitrate pursuant to the AAA Commercial Arbitration Rules (or under other provider rules requiring arbitration of arbitrability). A dispute arises under a different contract not containing an arbitration agreement, which you reasonably believe is not “related to” the contract containing the arbitration clause. But your adversary claims that the dispute must be submitted to arbitration.
Your business does not wish to arbitrate that claim, which you believe can be decided by a court more quickly and less expensively. You also believe your chances of obtaining a favorable decision are higher in court than in arbitration.
But because the incorporated-by-reference arbitration provider rules require arbitration of arbitrability, your business must submit the arbitrability claim to arbitration.
Will arbitrating, rather than litigating, the arbitrability question change the outcome? It could, and materially so.
Arbitrators, as disinterested as they may strive and believe themselves to be, are human beings like the rest of us. Because they are generally paid by the hour (or on another basis that directly or indirectly depends on how much work will be required to resolve the case), finding the dispute is not arbitrable will result in a fairly quick and simple resolution from the arbitrator’s standpoint, and thus a smaller fee.
In a close case the arbitrator’s conclusion could be unconsciously influenced by the indirect stake the arbitrator has in the outcome. And even apart from that, an arbitrator’s understandable institutional preference for arbitration over litigation could, in a close case, also increase the chances the arbitrator will rule the dispute arbitrable.
These indirect economic interests and institutional predispositions might be better managed if the arbitrator who makes the arbitrability decision would not be permitted to make the decision on the merits without the express, post-arbitrability-determination consent of the party who challenged arbitrability. But arbitrator provider rules do not ordinarily provide for that or any other kind of solution to the problem.
Whatever decision the arbitrator reaches on the arbitrability issue, a court ultimately reviewing the arbitrator’s arbitrability decision will not overturn it as long as the arbitrator even arguably interpreted the arbitration agreement, even if that interpretation was egregiously wrong. Translation: you’re stuck with the decision except in very unusual circumstances.
That is just one reason why businesspeople have to do their due diligence before agreeing to arbitrate under arbitration provider rules with which they may not be sufficiently familiar.
A Solution: Tailor Your Agreement to Incorporate only the Rules you Conclude are Reasonable and Appropriate in the Circumstances
Just because there may be certain aspects of a given set of provider rules that you are uncomfortable with doesn’t mean that you necessarily have to reject all of the provider’s rules. Arbitration provider rules often allow parties to opt out of or modify certain aspects of the rules, provided both parties consent.
That means you can tailor-make your arbitration agreement to incorporate only the rules you conclude are reasonable and appropriate in the circumstances.
The time to negotiate over which rules do and do not apply, of course, is before a dispute arises, that is, at the time the parties agree to include an arbitration clause in their contract.
To illustrate why that is so, consider once again the hypothetical discussed above. You wanted a court to decide arbitrability, but the other side wanted an arbitrator to decide arbitrability.
Obviously, once a dispute has arisen, and your adversary has determined it wants to arbitrate arbitrability, then you obviously cannot expect that your adversary is going to agree that arbitrability questions are for the court to decide. But at the pre-dispute, contract-formation stage, the other party might be perfectly willing to agree to opt out of Rule 7(a) and agree that any arbitrability questions have to be resolved by the court.
Photo Acknowledgments:
The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.
Section 10(a)(2) of the Federal Arbitration Act (the “FAA”) authorizes courts to vacate awards “where there was evident partiality. . . in the arbitrators. . . .” 9 U.S.C. § 10(a)(2). As respects neutral arbitrators, the U.S. Court of Appeals for the Second Circuit has long held that “[e]vident partiality may be found only where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” Scandinavian Reinsurance Co. Ltd. v. Saint Paul Fire and Marine Ins. Co., 668 F.3d 60, 64 (2d Cir. 2012) (quotations and citations omitted).
