Dispute Resolution
It is important to know whether your client would like to settle disputes via arbitration, mediation, or only through the court system.
Quite often practitioners use canned language for this section. For example: “Any and all disputes arising out of, or related to this Agreement, or the breach thereof shall be arbitrated.” Can you see why this leaves the door wide open for a number of interpretations? Which jurisdiction? Who is paying for it? Who is choosing the arbitrator? You can find some example clauses here.
The thing is though, that you should not treat an ADR provision as boilerplate. Consider whether certain parts of the agreement are better decided in court with a judge or decided by an arbitrator. You can specify what applies where in your agreement. For examples of this approach, see, Richard Hall and Matthias M. Pitkowitz, “Tailor-Made—Unique Dispute Resolution Clauses in M&A Agreements.”
In practice, it is often beneficial to get a litigator’s perspective on things as they can sometimes see something in your agreement that you otherwise may not think will cause litigation.
📖 Read Mark F. Foley’s “M&A Arbitration Clauses: “Watch-Outs” from a Litigator’s Perspective.”
According to Mark, some questions that need to be answered when considering arbitration are:
- What specific types of disputes do the parties want to decide with an arbitrator rather than a judge? Is specific technical expertise required?
- Are you likely to need discovery to get all the facts needed to resolve a dispute? Typical arbitration rules only permit discovery upon the agreement of the parties or the discretion of the arbitrator.
- What rules of evidence do you want to apply? Generally, arbitrators do not apply state or federal rules of evidence unless the parties agree. Usually, that means one party sees an advantage to having or not having formal rules of evidence and agreement will not likely be possible. It is better to make these decisions when the deal is put together, not after a dispute has arisen.
- Do you need a well-defined process for the dispute resolution? Courts have well-defined processes; arbitration has less well-defined processes.
- What rules do you want to apply? Major arbitration service providers, such as the American Arbitration Association, have extensive written rules for both domestic and international arbitrations. Other arbitration service providers have less extensive or less burdensome requirements.
- Do you need clear and correct application of the law? Arbitrators are not generally chosen based on their knowledge of the law. This can lead to significant problems because there is generally no appellate review of the Award to correct for legal errors. An arbitration award can be confirmed even if it was based on errors of law and fact.