by Andrew Flake
Drafting the arbitration clauses — the why and the how — is a fundamental topic worth revisiting. The arbitration clause serves as the gateway to dispute resolution, and its quality determines whether parties can efficiently resolve their disagreements or face costly jurisdictional battles.
Let’s start with the doctrine of severability. Under the Federal Arbitration Act, the arbitration clause enjoys special status in comparison with the rest of the contract in which it resides. This principle, established in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), and reaffirmed in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), means that challenges to the underlying contract—even fraud in the inducement claims—do not automatically invalidate the arbitration clause itself. The validity of the arbitration clause is analyzed separately from the contract as a whole.
Only when fraud is directed specifically at the arbitration clause itself will a court consider the challenge rather than defer to arbitration. This unusual circumstance underscores the importance of drafting a clear, unambiguous arbitration clause.
Turning to its essential elements, every arbitration clause should address the parties’ intent to arbitrate, the applicable rules, the seat of the arbitration
Intent to Arbitrate. Arbitration is a creature of contract. The parties must clearly agree to arbitrate, in writing, and courts will examine the scope of the clause to determine whether a particular dispute falls within it. Well-established language such as “all disputes arising out of or relating to this agreement” has been consistently upheld. Practitioners can find excellent clause-building tools and resources on the sites of major arbitrator institutions—some now powered by AI—to assist in drafting.
Applicable Rules. The choice of rules typically implies administration by the institution whose rules govern the arbitration. Whether you select AAA Commercial Rules, JAMS Comprehensive Arbitration Rules, or another set, understand what the rules cover and what they leave to party agreement.
Seat of the Arbitration. The seat (or juridical location) has implications beyond mere geography. It determines which procedural law governs the arbitration and which courts have supervisory jurisdiction. Most modern rule sets permit arbitrators to conduct hearings virtually or in multiple locations, but if a physical hearing is essential, specify that requirement clearly.
Choice of Law. While the Federal Arbitration Act governs the enforceability of arbitration agreements in most commercial contexts, state law determines how the arbitration clause itself is interpreted and construed. Specifying the governing law—whether New York, Georgia, Delaware, or another jurisdiction—provides certainty about which state’s contract interpretation principles will apply. This choice matters particularly when disputes arise over the scope of the arbitration clause or the validity of specific provisions.
Number of Arbitrators. Rule sets typically provide defaults (often one arbitrator for smaller disputes, three for larger ones). A three-arbitrator panel adds deliberative value, while it can add substantial cost. Consider whether the stakes and complexity justify the expense.
Additional provisions worth considering include
- Language of the proceedings (particularly important in international contexts)
- Limitations on discovery or information exchange
- Timing requirements for the arbitration
- Number of arbitrators (a full panel, a streamlined panel option, where available, or a sole arbitrator), where different from the rule set’s defaults
- Qualifications for arbitrators (industry expertise, legal background, etc.)
- Pre-arbitration dispute resolution steps
On this last point, I favor escalation clauses requiring parties to confer before initiating arbitration—whether through a management-level meeting or mediation. These provisions often resolve disputes before formal proceedings begin.
Here’s the cautionary note: over-tailoring the clause can be counterproductive. When parties create overly bespoke processes with rigid timelines and procedural requirements, they sacrifice one of arbitration’s key advantages—the flexibility for an engaged arbitrator to tailor procedures to the specific dispute at hand.
For example, rigid timing provisions can become unrealistic once discovery reveals the case’s true scope. The arbitrator who hears from the parties about their needs is better positioned to set a workable schedule than the drafter anticipating those needs months or years in advance.
Parties sometimes carve out certain matters for court jurisdiction, such as injunctive relief in employment agreements. Before creating such carve-outs, consider that many arbitral institutions now offer emergency arbitrator procedures. Such provisions (AAA’s Rule 39 or JAMS Rule 2(c), for instance, can provide an option for rapid relief without splitting the dispute between forums.
Carve-outs, if not very carefully drawn, can create the risk of parallel proceedings and disputes over which decision-maker—court or arbitrator—should decide threshold issues.
An excellent resolution for the New Year, if you’d like to start planning early, is to check current forms of agreement and existing arbitration clauses for clarity and content.
Effective arbitration clauses balance structure with flexibility. They provide clear intent to arbitrate, select appropriate rules and procedures, and avoid over-engineering the process. When drafted thoughtfully, they create a reliable framework for efficient dispute resolution. When drafted poorly or left to standard boilerplate, they become sources of litigation themselves, the very outcome they were meant to avoid. -ABF