Businesses frequently find themselves entangled in litigation despite having arbitration clauses in place. The culprit often lies in poorly drafted arbitration agreements, which rely on outdated boilerplate language that misses the mark on crucial objectives. These core goals include clearly defining the scope of the agreement and mitigating potential court battles regarding its enforcement. As the US Supreme Court emphasized in Coinbase, Inc. v. Suski, “the first question in any arbitration dispute must be: What have these parties agreed to?”
While customization to individual circumstances and jurisdictions is essential, any arbitration agreement should incorporate certain key provisions. Firstly, it is imperative that arbitration agreements explicitly state that the Federal Arbitration Act (FAA) governs their interpretation and enforcement. Without this specification, the benefits of the FAA cannot be fully realized. One primary advantage is the extensive case law that supports arbitration agreements under the FAA, including recent decisions by the Supreme Court reversing lower courts’ refusals to compel arbitration. Yet, many agreements omit this provision, resulting in costly courtroom disputes over the applicable law.
Avoiding state arbitration laws is critical since they may not offer the same level of protection as the FAA. Even those modeled after the FAA lack the robust, favorable case law that their federal counterpart provides.
The scope of an arbitration agreement should be as expansive as possible, encompassing “all claims arising from or relating to the contract and/or the relationship between the parties.” For example, within the jurisdiction of the US Court of Appeals for the Fourth Circuit, an agreement solely covering claims related to the contract necessitates a “significant relationship” test to determine arbitration eligibility. However, when an agreement also includes the “relationship between the parties,” this additional hurdle is removed, thus simplifying the process of compelling arbitration.
Inclusion of a delegation clause is another critical recommendation. This clause mandates that if a party contests arbitration, the arbitrator, not the court, will resolve queries of arbitrability, validity, or enforceability. Ideally, the court’s sole involvement should be confirming the existence of an arbitration agreement, a matter of contract formation under state law principles that cannot be delegated.
Despite common awareness of clauses delegating arbitrability questions—i.e., who is bound by the clause and the scope of disputes—many legal professionals overlook the importance of delegating questions of contract validity or enforceability. These issues often involve intricate, fact-specific debates over unconscionability and other state law defenses to contract enforcement, which can lead to undesirable outcomes if left to the court. Courts frequently conflate contract formation with enforceability, so delegating the latter to an arbitrator can reduce confusion and streamline the process.
While this article highlights three critical steps, numerous other provisions can further fortify arbitration agreements against protracted litigation. Prioritizing a well-drafted, current mandatory arbitration clause is crucial for safeguarding companies from complex legal battles. The overarching aim is to make the court’s role as direct and limited as possible, thereby simplifying the pathway to arbitration.
For more information on the subject, please refer to Bloomberg Law.