The Four “Cs” of Drafting an Effective Arbitration Clause

Arbitration is not suited for every contract, dispute, or business. However, a comprehensive and well-drafted arbitration clause will allow the parties to reap the benefits of arbitration, which are a faster, more efficient and lower-cost resolution of a dispute.

An effective arbitration clause must clearly commit the parties to arbitration and identify the types of disputes that will be arbitrated. In domestic commercial contracts, parties have great latitude to shape how they will resolve disputes, who will resolve them, where, and according to which rules. However, a party can fail to make the arbitration clause as comprehensive as it should be and find itself shocked at the procedure it has obligated itself to pursue.

Where important business relationships are involved, parties may consider requiring mandatory negotiation or non-binding mediation before commencing an arbitration proceeding. In this regard, the arbitration agreement should include language that allows a court to enter judgment on the award and specifies the court in which a motion to confirm should be filed. The parties may also consider limiting judicial review of an arbitration award or requiring that appeals be made to a private arbitration panel and be limited to specified grounds.

There is no way to anticipate every potential issue that may present itself when a dispute between contracting parties arises, but a well-drafted arbitration clause may prevent a costly detour through the courts or an arbitration proceeding that does not meet a party’s expectations.