Arbitration Clauses Can Determine Future Success – Or Failure

I had the pleasure of attending this year’s California International Arbitration Week, which is a great conference that presents and discusses recent trends and lessons learned in the context of international arbitration. While much of the content was geared towards attorneys and how we can better facilitate resolution via arbitration, there were several prominent points that I felt our clients could benefit from as well. First up: why your arbitration clauses can really set clients up for success or failure before any dispute even arises.

Why Alternative Dispute Resolution Clauses Are Especially Important in the International Context

For those who are luckily unfamiliar with litigation, alternative dispute resolution (or “ADR”) clauses in their contracts are typically paid very little attention. In many contracts, the ADR clause is essentially boilerplate language that’s pulled from the internet or some old document – and it’s recycled again and again without thought to the context of the transaction or contract.

One industry that was commonly focused on was the technology industry. Cross-border technology disputes are not only on the rise, they are also getting increasingly complicated and tend to encompass various issues – intellectual property rights, trade secrets, licensing agreements, etc. When the background of a deal is this technical, and especially when the deal involves two or more parties from different countries, the ADR clause becomes intensely important if a dispute unfortunately arises down the line.

What the ADR Clause Does

If triggered, the ADR clause can determine so much for the parties at the outset. This includes: where any dispute needs to be resolved (court vs. arbitration vs. mediation), what the parties need to do even before then, and which national law applies. Here are a few key recommendations in crafting them:

  1. To the extent possible, keep the clause as simple as possible. For example, be clear the parties intend to arbitrate, and where, and in what language.
  2. Limit pre-litigation/pre-arbitration steps that are extremely onerous. In recent years, we’ve been seeing more and more clauses that require a “good faith” resolution process that can be dragged out for years before a lawsuit or arbitration claim can be filed.
  3. In arbitration, determine whether the arbitrator(s) needs to have specific experience or knowledge. The huge benefit of arbitration is that the parties can pick their decisionmaker – in order to avoid a lengthy back and forth process to choose that decisionmaker, set out some necessary qualifications at the outset.

The bottom line is, clients should not skirt over the ADR clause when drafting contracts. Nobody wants to think about their business or partnership going awry in the future, but the more clients consider how they’re going to handle potential disputes down the line, the more they’re protecting themselves and potentially saving tons of money and time down the line.