Getting the “Right Stuff” in Arbitration Agreements

By Leslie King O’Neal

“The Right Stuff” in Arbitration Agreements

Poor Drafting Costs Time & Money

The blog posts from the last two weeks illustrated how poorly drafted arbitration agreements can result in extensive litigation unrelated to the merits of the dispute. These arbitration clauses didn’t help the parties resolve their disputes efficiently and cost-effectively. Same Parties, Four Arbitrations, Four Different Awards – The Construction ADR Toolbox; Conflicting ADR Clauses: Who Decides Priority?- The Construction ADR Toolbox. This is the worst outcome for clients who wanted to resolve disputes efficiently and cost-effectively in arbitration. Unfortunately, arbitration clauses are often the last contract term drafted or negotiated. Parties in the honeymoon stage of a project don’t want to discuss possible disputes. Frequently the lawyers drafting these clauses are not familiar with the differences between arbitration and litigation. Consequently, either they throw in the kitchen sink (including the Federal Rules of Civil Procedure and Evidence) or they write a bare bones clause with little detail about how the arbitration should be managed.

Avoiding Common Mistakes–Including “The Right Stuff”

This week’s post offers tips on avoiding common mistakes in drafting (or negotiating) arbitration clauses.[ii] In my experience, it’s rare for a construction lawyer to draft the complete arbitration clause. More often the owner’s lawyer and the general contractor’s lawyer (or the GC’s lawyer and the subcontractor’s lawyer) negotiate the clause’s wording. In these negotiations there’s a tension between the desire to get the deal done and the need to have a clear arbitration clause. Achieving the right balance requires considerable lawyering skill.

FAA Minimum Requirements

The FAA requires only that arbitration agreements be in writing and involve interstate commerce to be enforceable.[iii] But, this is only the minimum. There are other important features that should be included in an effective, enforceable arbitration agreement.

Define Arbitrable Disputes

The agreement should define what disputes are “arbitrable.” AAA and JAMS (and other organizations) provide sample arbitration clauses with very broad scopes, which can reduce disputes about arbitrability. Also, if the AAA and JAMS rules are incorporated, these allow the arbitrator to decide arbitrability issues. Incorporating an organization’s rules gives arbitrators considerable powers, so counsel should review the rules before agreeing to this. Some contracts contain extremely broad clauses that include tort claims and non-signatories. See https://theconstructionadrtoolbox.com/2025/01/non-signatories-may-compel-or-be-compelled-to-arbitrate/.

Clearly State Intent to Arbitrate

The arbitration agreement should clearly state that the parties intend to resolve disputes through arbitration. Including language about litigation in the arbitration clause may spur a lawsuit, thus defeating the purpose. For example, this clause: “The parties agree to submit disputes to arbitration, but in case of litigation, the courts of California shall have jurisdiction,” doesn’t specifically commit the parties to arbitration.

Tailor the Clause to the Project

Many construction contracts include standard form arbitration clauses. There is nothing wrong with these, but they may not include some things important to a specific project or deal. Some clients prefer a “stepped” ADR approach with negotiation or mediation before arbitration; others don’t. Also, if the project has strict confidentiality requirements, including a confidentiality agreement in the arbitration clause may be advisable to protect documents produced and prevent parties or witnesses from commenting on the dispute. See post on confidentiality in arbitration and afterward.https://theconstructionadrtoolbox.com/2024/09/confidentiality-in-arbitration-and-afterward/

Also consider if the arbitration agreement should include other entities, such as sureties, guarantors, or tenants. If there are multiple agreements on the project, coordinating the dispute resolution process among them can prevent conflicts and secondary disputes.

Fill in the Blanks

 While a bare bones arbitration clause can be enforceable, it puts the burden on the parties and their counsel to create the necessary structure while they are embroiled in the dispute. The arbitration clause should provide at least minimum fundamentals about how the arbitration will be conducted. Stating that AAA or JAMS (or another provider) will administer the arbitration provides a foundation for managing the case. In addition to providing rules and ethical guidelines, these organizations maintain lists of arbitrators, collect fees, provide mechanisms to deal with issues such as when an arbitrator resigns or is disabled, resolve challenges to arbitrators for alleged conflicts of interest. They maintain offices in many locations, which are available for hearings. Of course, the organization is compensated for these services. But without an administrator, the parties and arbitrators must manage the case themselves and may need to seek court intervention, which can be cumbersome and expensive.

Be Realistic

 Some drafters include unrealistic education or experience requirements for arbitrators, making it extremely difficult to complete a panel. Unrealistic time constraints for completing the arbitration also create difficulties. And the arbitrators may decide the time constraints are unconscionable and simply ignore them, as shown in the Sullivan et al. v. Feldman et al. case in last week’s post.[iv] The arbitration agreement in Sullivan required completing arbitration within four months. The arbitrators decided this deadline was unconscionable and didn’t enforce it. The Fifth Circuit upheld this decision under the arbitrators’ broad powers.

Avoid Litigation Envy

 One of the benefits of arbitration is its flexibility. Typically, the state and federal rules of civil procedure and evidence don’t apply. Inserting these into the arbitration process increases the time and cost with no real benefit (since legal errors are not grounds for overturning an arbitration award). AAA and JAMS have procedural rules to govern their cases, so adding state or federal rules is not advisable.

Avoid Overreaching

Tilting the arbitration playing field too far in favor of your client may backfire. Courts have refused to enforce manifestly unfair arbitration agreements as unconscionable.  The 4^th Circuit did just that in Hooters of America, Inc. v. Phillips,[v] finding the arbitration agreement rules “so one-sided that their only possible purpose is to undermine the neutrality of the proceeding.”

Takeaways

 Although arbitration clauses are often the last contract term drafted or negotiated, it’s worthwhile to spend time to review them carefully. Discuss the project and the client’s needs before the negotiations. Should there be a stepped ADR process? Is confidentiality important? Draft a checklist of important points and preferred language in advance to use during negotiations. This will help get “the right stuff” into the arbitration agreement.

Be sure the arbitration provision:

• Clearly commits the parties to binding arbitration
• Defines what disputes are arbitrable
• Selects an arbitration administrator and applicable rules (e.g. AAA or JAMS)
• Provides for entry of final judgment after award (essential for enforcement)

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[i] Tom Wolfe’s book The Right Stuff The Right Stuff | The Folio Society chronicles the Mercury Seven astronauts in the early US space program. To be an astronaut required having unique mental and physical skills –“the right stuff.”

[ii] This section is adapted from John Townsend, Drafting Arbitration Clauses:  Avoiding the 7 Deadly Sins, 58 Disp. Resol. J. 28 (2003) (cited in Stipanowich and Schmitz, Arbitration Practice, Policy, and Law (Aspen 2023).

[iii] Federal Arbitration Act, 9 U.S.C. §2. 9 U.S. Code § 2 – Validity, irrevocability, and enforcement of agreements to arbitrate | U.S. Code | US Law | LII / Legal Information Institute.

[iv] Case: 23-20140  (March 11, 2025) Sullivan v. Feldman, No. 23-20140 (5th Cir. 2025) :: Justia

[v] 173 F.3d 933 (4^th Cir. 1999) Hooters of Am., Inc. v. Phillips, 173 F.3d 933 | Casetext Search + Citator