Ethical and Practical Guidance to Avoiding Pitfalls When Drafting Arbitration Clauses October 11, 2016 LIONEL M. SCHOOLER JACKSON WALKER, L.L.P. 1401 McKinney, Suite 1900 HOUSTON, TEXAS 77010 (713) 752-4200 (713) 752-4221 (FAX) E-MAIL: lschooler@jw.com Lionel M. Schooler 2016
2 TOPICS FOR DISCUSSION
3 THE EASY WAY OUT Elderly couple from the East Coast involved in a real estate dispute concerning property located in Houston. The arbitration clause applicable to their dispute stated as follows:
4 THE EASY WAY OUT All disputes shall be arbitrated according to the laws of the United States
5 NUTS AND BOLTS OF ARBITRAL PROCESS Scope of the Dispute What issues are to be arbitrated? Can some issues be excluded? Ethical Restrictions? (Employment Cases) Class Action waiver? Specifying venue in a distant locale?
NUTS AND BOLTS OF ARBITRAL PROCESS Flexibility of Arbitration--Tailoring the process to fit the scope of the dispute One arbitrator vs. three arbitrators? How much money do you want to spend? What should the qualifications of the arbitrators be? What authority do you want to give the arbitrator (can he/she decide his own jurisdiction)? Lionel M. Schooler 2016 6
7 NUTS AND BOLTS OF ARBITRAL PROCESS How are the arbitrators to be selected -- neutral or party-appointed? Which statute will govern the Arbitration (FAA vs. TAA)?
8 NUTS AND BOLTS OF ARBITRAL PROCESS Ethical Issues in Drafting Choice of Law: Differences between FAA and TAA arbitration and impact upon drafting Ethical Issues in structuring arbitration process: Cannot change horses in midstream
9 NUTS AND BOLTS OF ARBITRAL PROCESS Difference between choice of law and governing arbitration statute Ethical Example: battle of conflicting governing laws Ethical Example: restricting who can participate in the arbitration
10 NUTS AND BOLTS OF ARBITRAL PROCESS Will the Arbitration be administered? If so, by whom? ( Ad Hoc proceedings) Who pays costs of administration? Ethical Consideration: What are the consequences of not paying contractually imposed costs?
11 NUTS AND BOLTS OF ARBITRAL PROCESS Who will pay the upfront cost of arbitrating? How long does a party have to file a claim? Ethical Issues: Imposing contractual limitations periods [how short is TOO short?]; Class action waiver?
12 ADMINISTERING THE PROCEEDING What if one party refuses to participate? Ethical Issue: Can default be declared? Ethical Issue: Impact of default on nondefaulting party s burden of proof, etc. Ethical Issue: What costs can be imposed upon a party (employment case)?
13 LAW OF THE PROCEEDING What substantive law governs the dispute? What rules of procedure govern? (Be careful what you wish for!!) What rules of evidence govern? What discovery shall be permitted, if any? Will I need injunctive relief before the arbitration hearing?
14 LAW OF THE PROCEEDING (cont.) What if there is a dispute over discovery before the Arbitration hearing? What if I need to enforce a subpoena before or at the Arbitration hearing? How long shall the parties have to make their respective presentations? Can the arbitrator(s) foreclose a party s presentation for exceeding allocated time?
15 GETTING TO AN AWARD When shall the arbitrators decide the case? How shall the arbitrators decide the case? Result only ( X wins ); Reasoned Award ( X wins because..); Findings of Fact/Conclusions of Law Ethical Issue: What is a Reasoned Award?
16 ENFORCING/CHALLENGING THE AWARD Does my client have an opportunity to comply with the award without court process? How do the parties enforce / challenge the award? (Confirm; Vacate; Modify) Ethical Issues with Vacatur
17 ENFORCING/CHALLENGING THE AWARD Does my client get attorney s fees for having to enforce the award? Ethical Issue: Attorney s fee clauses What right of appeal, if any? (Nafta Traders; Hoskins) Attorney s fees for winning on appeal?
QUESTIONS? Lionel M. Schooler 2016 18
LIONEL M. SCHOOLER JACKSON WALKER, L.L.P. 1401 McKinney, Suite 1900 HOUSTON, TEXAS 77010 (713) 752-4200 (713) 752-4221 (FAX) E-MAIL: lschooler@jw.com Lionel M. Schooler 2016 19
20 SAMPLE AGREEMENT
21 SAMPLE AGREEMENT What follows are sample clauses to use when drafting your arbitration agreement. Think before you use them!
22 Sample Arbitration Agreement: Suggested Scope Clause In consideration of their joint efforts to avoid litigation and its attendant costs, delays and risks, the parties agree that all disputes or defaults arising out of or related in any manner to this Agreement or any other document being executed contemporaneously herewith shall be resolved by binding arbitration....
23 Sample Arbitration Agreement: Suggested Arbitration Statute Clause... under the Federal Arbitration Act, 9 U.S.C. 1 et seq./ Texas Arbitration Act ( TAA ), TEX. CIV. PRAC. & REM. CODE 171.001 et seq.,...
24 Sample Arbitration Agreement: Suggested Rules Clause... according to the Rules of Commercial Arbitration of the American Arbitration Association ( AAA ) then in effect.
25 Sample Arbitration Agreement: Suggested Expanded Review Clause In accordance with the Texas Supreme court holding in Nafta Traders v. Quinn, in an arbitration governed by the TAA, the parties may expand the review of the award by using language such as the following:
26 Sample Arbitration Agreement: Suggested Expanded Review Clause "The arbitrator does not have authority (i) to render a decision which contains a reversible error of state or federal law, or (ii) to apply a cause of action or remedy not expressly provided for under existing state or federal law."
27 Sample Arbitration Agreement: Suggested Limitations Clause A party who has a claim must initiate the arbitration process in the manner stated herein within one (1) year of the date the Claim arises, or the date by which the claimant knew or should have known under applicable Texas law of the existence of such Claim, but in no event more than two (2) years after the date of this Agreement.
28 Sample Arbitration Agreement: Suggested Limitations Addendum Failure to initiate a claim timely bars the prosecution of such a claim, and if a party initiates arbitration where it is later determined by either a court of competent jurisdiction or an arbitration tribunal that the claim was untimely filed without the fault of the Respondent, then the Respondent shall, in addition to any other relief to which it may show itself to be entitled under applicable law, be entitled to recover all attorney s fees and expenses actually incurred because of the filing of such untimely claim.
29 Sample Arbitration Agreement: Suggested Court Action Clause Nothing contained herein shall prevent a party from initiating suit in a court of competent jurisdiction in County, Texas, in good faith, for the sole purpose of compelling arbitration, nor shall it prevent any party from requesting from such court, in good faith, to enter any injunctive relief which is otherwise appropriate under Texas law for the limited purpose of maintaining the status quo of the parties pending arbitration, or as part of any final award of arbitration or in aid of arbitration.
30 Sample Arbitration Agreement: Suggested Jury Waiver Clause The parties agree that it shall not be a defense to any claim to be arbitrated herein that they were fraudulently induced, or that they relied upon faulty advice of counsel of their own choosing. The parties acknowledge that they have been advised by attorneys of their own choosing that in signing this Agreement, they are irrevocably waiving their rights to a trial before a judicial tribunal or trial by jury in any court, except as is necessary to enforce this Agreement or any award resulting from arbitration under this Agreement.
31 Sample Arbitration Agreement: Suggested Panel Composition Clause The dispute shall be resolved by a single neutral/three neutral arbitrators, chosen by the parties from the AAA s list of arbitrators who have experience in real estate / construction / financing / employment / commercial / transactional matters covered by this Agreement and any other document being executed contemporaneously herewith.
32 Sample Arbitration Agreement: Suggested Locale Clause The arbitration shall be conducted at such offices in Houston, Harris County, Texas, as shall be mutually agreed by the parties or, if not agreed, as shall be designated by the Arbitration Panel.
33 Sample Arbitration Agreement: Suggested Choice of Law Clause Texas law shall govern this proceeding.
34 Sample Arbitration Agreement: Suggested Fees Clause The parties shall initially bear equally, one-half by Claimant and one-half by Respondent, the costs of such arbitration. [IN EMPLOYMENT CASES] Except for an initial deposit not exceeding $100, Claimant shall not bear any other initial cost of this proceeding.
35 Sample Arbitration Agreement: Suggested Default Clause The parties further agree that failure to pay shall constitute a default under this Agreement. If at any time a party shall fail to pay when due any amount requested by the AAA as part of the cost of arbitration, and shall thereafter fail within ten (10) days to pay such amount in full after having received from the AAA a written request to do so, then that party shall be deemed irrevocably to have waived all claims for affirmative relief and all defenses to claims for relief by the non-defaulting party. The non-defaulting party shall have the right to be awarded and to recover from the defaulting party reasonable attorney s fees because of such default, in addition to any other relief to which it or they may be entitled.
36 Sample Arbitration Agreement: Suggested Time Limits Clause The parties agree that they intend by entering into this arbitration agreement to save time and expense, and accordingly agree to the following time limits of presentation: (1) For any claim filed where the amount being sought is less than $, the party prosecuting such claim shall have day(s) of arbitration time to present such claim. If the amount being sought exceeds $, the party prosecuting such claim shall have time to present such claim as the Arbitrators shall declare.
37 Sample Arbitration Agreement: Suggested Time Limits Clause (cont d) The party defending such claim shall have an equal amount of time to present a defense. Any party exceeding its established time limit shall be responsible for the full cost of any additional day of presentation time for its claim or defense, including the attorney s fees of the opposing party for each such day.
38 Sample Arbitration Agreement: Suggested Additional Recovery Clause In any arbitration proceeding conducted subject to these provisions, the arbitrator shall be authorized to award to the prevailing party in such proceeding a reasonable attorney s fee, prejudgment interest at the rate of ( %) percent per annum, simple interest, and the costs of this arbitration, in addition to any other relief to which it or they may be entitled.
Sample Arbitration Agreement: Suggested Timing of Award Clause The award shall be rendered within thirty (30)/ten (10) days after the close of the hearing in accordance with the AAA Rules then in effect. In rendering an award, the arbitrator shall state the reasons/issue findings of fact and conclusions of law/identify the prevailing party, including any computations of actual damages or offsets, if applicable. Lionel M. Schooler 2016 39
40 Sample Arbitration Agreement: Suggested Post-Award Interest Clause The award shall bear interest on the amount owing at the rate of ( %) percent per annum, simple interest, from the date of issuance until the date paid in full.
41 Sample Arbitration Agreement: Suggested Enforcement Clauses The prevailing party shall be entitled to seek enforcement in any court of competent jurisdiction in County, Texas,... and shall be entitled to recover, in addition to the award, an additional amount equal to the attorney s fees actually incurred for enforcement of the award,... together with interest thereon at the rate of ( %) percent per annum, simple interest.