Careful What You Wish For: Arbitration Provisions Can Get Lost In The Shuffle If You Amend An Agreement And Do Not Reference Arbitration In The Amendment

Broad arbitration provisions cannot compel parties to arbitrate claims not arising out of the subject matter covered by the arbitration agreement. A party to a contract must be careful when agreeing to subsequent or supplemental agreements because unless expressly referenced, the broad arbitration agreement in one contract may not cover a dispute arising out of the other contracts.

For example, in New Jersey, notwithstanding a very strong state public policy regarding compulsory counterclaims and joinder, the State case-law draws a bright line between claims that must be arbitrated under an agreement between the parties and claims that must be litigated (i.e. not added to the arbitration as a compulsory counterclaim or under a joinder rule). In short, in New Jersey, much like New York, a court will not compel a party to arbitrate a matter that the party has not expressly and knowingly agreed to arbitrate. This makes sense because agreeing to arbitrate is an agreement to waive or give up a right to access the courts and waiver of such an important right should not be treated lightly.

In New York, it’s a similar analysis. New York Courts are confronted daily with applications to compel or avoid arbitration – usually brought by “Orders to Show Cause” seeking emergency relief. The emergency is generally because once a party participates in an arbitration, they cannot later complain of waiving their right to litigate the matter. Because arbitration may be onerous – indeed, some litigants in certain situations may prefer to litigate in Court than pay an arbitrator and undergo an arbitration – parties to a dispute take the arbitration v. litigation issue very seriously.

In short, whichever the preference, a party to a dispute should not shoot first and answer questions later. Arbitration provisions in a contract should be carefully thought-out and, if there are amendments or supplemental agreements, the party’s choice to (or not to) arbitrate should be protected in those later agreements.

The Unspoken D-I-Y Option: Independent Arbitration

Critics of arbitration often assert that arbitration under JAMS, AAA and other well-known arbitration service-providers ("Providers") has the potential to become more expensive then pursuing traditional litigation. The argument goes that deep-pocketed entities use arbitration as a bludgeon to force adversaries with little or no resources to settle or abandon their claims.

SDNY Local Counsel has appeared in a number of arbitrations administered under various Providers and those Providers offer excellent services that may be the right choice in certain circumstances. However, arbitration under certain Providers--especially arbitration in which extensive discovery is allowed--may become extremely expensive.

Stepping over this debate, SDNY Local Counsel wishes to remind our readers of a potential low-cost alternative: "Independent Arbitration." The fact is, many lawyers, retired judges and other trustworthy, fair-minded individuals are willing to act as arbitrators for a flat or low-hourly fee and conduct an arbitration at a convenient, low or no-cost location (such as a law office conference room). In short, D-I-Y arbitration may offer all concerned significant savings. However, if Independent Arbitration is of interest to you, there are a few things to be aware of:

1) in order to pursue independent arbitration the arbitration clause in your agreement should not specify administration under any Provider;

2) if an arbitration clause does not specify a procedure, the parties will have to decide on the proper procedure to select an Arbitrator and, also, a proper procedure under which to conduct the Arbitration. Leaving these details to be decided after the parties to an agreement are in dispute is a recipe for disaster. Accordingly, an Independent Arbitration clause should refer to a general set of rules to follow or state certain basic rules expressly.

3) even if you expressly state a low-cost procedure in your arbitration clause as a substitute for a Provider's rules, you may not be fully protected -- your adversary may be able to make an end-run around your procedures by insisting on following the Provider's rules instead. For example, one Provider states in its rules that previously agreed upon procedures different from the Provider's rules may be used, but only if all parties agree to such procedures in writing after the Arbitration commences. Thus, an adversary could easily balk at the previously agreed upon procedures and force you to follow a Provider's procedures after an arbitration is commenced.

By means of example and for purposes of discussion, SDNY Local Counsel provides this Sample Rules for Independent Arbitration as a guide for would-be arbitration do-it-yourself-ers.