Arbitration Clauses: Review and Negotiate with AI

What is an Arbitration Clause?

Contracts can sometimes give rise to disputes between parties. An arbitration clause provides a mechanism for resolving these disagreements outside of traditional court proceedings. This article will explore the nature of arbitration clauses and their effective implementation in various agreements.

The core of an arbitration clause mandates arbitration as the primary dispute resolution method, but it goes further by specifying the rules and procedures for the arbitration process. It defines the number of arbitrators and how they will be selected, establishes the location and language of proceedings, and typically states that the arbitration award is final and binding.

An arbitration clause typically stipulates that:

• A neutral third party (an arbitrator) will adjudicate any disputes
• Specific procedures will be followed in the dispute resolution process
• The arbitrator's decision will be final and binding on all parties

These clauses can be comprehensive, covering all potential disputes, or narrowly tailored to address specific issues. This flexibility allows parties to customize the clause to their particular needs and circumstances.

Legal frameworks generally support the enforcement of arbitration clauses. In the United States, the Federal Arbitration Act provides strong backing for these provisions. Internationally, the New York Convention facilitates the recognition and enforcement of foreign arbitral awards across its signatories. However, it's important to note that in some jurisdictions, certain types of disputes may be deemed non-arbitrable on public policy grounds. This highlights the need for careful consideration when drafting and negotiating these clauses.

Where to Use Arbitration Clauses

Arbitration clauses are versatile and can be found in many types of agreements. Here are some common examples:

• Non-Disclosure Agreements (NDAs): Arbitration offers an extra layer of privacy for disputes involving sensitive information.
• Master Purchase Agreements: These clauses provide an efficient way to resolve conflicts over quality, delivery, or payment issues in MPAs.
• Software as a Service (SaaS) Terms of Service: Tech companies often include these clauses to allow for arbitrators with technical expertise, which can be crucial for complex IT-related disputes.
• Master Services Agreements (MSAs): Arbitration clauses help maintain long-term business relationships by offering a less adversarial way to resolve disputes.
• International business deals: These clauses are particularly useful in cross-border transactions, offering a neutral forum and avoiding potential biases of national courts.
• Construction contracts: The construction industry often uses arbitration clauses to resolve technical disputes with industry-specific expertise.
• Merger and Acquisition (M&A) agreements: Arbitration can provide confidentiality for sensitive post-closing disputes.
• Employment contracts: Companies often use these clauses to manage litigation risk, though this practice is under increasing scrutiny in many places.
• Consumer contracts: While common, arbitration clauses in consumer agreements are closely examined by courts and regulators to ensure fairness.
• Intellectual property licenses: These agreements benefit from arbitration clauses due to the need for confidential resolution of disputes over royalties or alleged infringements.

While arbitration clauses offer significant benefits in these contexts, it's crucial to consider the specific circumstances of each agreement. Parties should be aware of any legal limitations on arbitration clauses and carefully weigh the advantages and potential drawbacks before including them in their contracts.

Negotiating Arbitration Clauses

Effective negotiation of arbitration clauses requires careful consideration of several key factors. When working on arbitration clauses, keep these points in mind:

1. Scope: Decide what kinds of problems the clause will cover.
2. Rules: Choose which arbitration rules to follow and who will manage the process. Options like the International Chamber of Commerce (ICC) or the American Arbitration Association (AAA) offer different rules and levels of administrative oversight. The choice should be based on the complexity of potential disputes and the desired level of institutional involvement.
3. Arbitrators: Decide how many arbitrators to use and how to choose them. Parties may opt for a sole arbitrator for simpler disputes or a panel of three for more complex cases. The method of selecting these arbitrators should be clearly outlined in the clause.
4. Location: Pick where the arbitration will happen. This is crucial, particularly for international contracts. It should be a location with arbitration-friendly laws, and for cross-border agreements, a neutral venue is often preferable. 
5. Language: Choose what language to use in the arbitration.
6. Governing Law: Decide which laws will apply. It's advisable to select a well-developed body of law that is familiar to potential arbitrators. 
7. Privacy: Confidentiality is often a key benefit of arbitration, but it's not automatic. If confidentiality is important, explicit provisions should be included in the clause.
8. Evidence: Decide how to handle evidence and information sharing. Parties should also consider how to handle discovery and evidence submission, potentially incorporating specific rules to govern these aspects. Preserving the ability to seek court-ordered interim relief can be important, and this should be explicitly addressed in the clause if desired.
9. Court Help: Decide if you still want to be able to ask courts for some kinds of help.
10. Costs: Agree on who will pay for the arbitration. Options include each party bearing their own costs, the "loser pays" system, or leaving it to the arbitrators' discretion. Some clauses include a multi-tier dispute resolution process requiring negotiation or mediation before arbitration.
11. Multi-Step Process: Consider requiring negotiation or mediation before arbitration.
12. Multiple Parties: If your deal involves many people or contracts, think about how to handle that.
13. Emergency Help: Consider including a way to get quick help in emergencies.

Remember, the clause should be fair to everyone. If it's too one-sided, a court might not enforce it. Also, be aware of any special rules in your industry that might affect arbitration.

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AI Contract Review for Arbitration Clauses

To give you a sense of the benefits of leveraging AI Contract Review Software trained by lawyers, we’ve selected some sample language our software presents to customers during a review of Arbitration Clauses in Master Service Agreements (MSAs). Keep in mind that these are static in this overview but dynamic in our software - meaning our AI identifies the key issues and proactively surfaces alerts based on importance level and position and provides suggested revisions that mimic the style of the contract and align with party names and defined terms.

If you’d like to see more, we invite you to book a demo.

‍Sample Clause for Arbitration

Any dispute arising out of or in connection with this Agreement, including any questions regarding its existence, validity, or termination, shall be settled by arbitration administered by [●●] in accordance with the Arbitration Rules of [●●] for the time being in force. These rules are deemed to be incorporated by reference into this Article. The place of arbitration shall be [●●]. The number of arbitrators shall be [●●]. The language of the arbitration shall be [●●]. The arbitration award shall be final and binding on the parties. [Each party shall bear the cost of its own attorneys' fees./The prevailing party shall be entitled to recover reasonable attorneys' fees, in addition to any other relief, such as court costs, from the non-prevailing party.] Nothing in this Article prevents any party from seeking equitable remedies in a court of competent jurisdiction.

‍Sample Clause for Choice of Forum

Any suit, action, or proceeding arising out of, or in connection with, this Agreement and all contemplated transactions shall be submitted to the [●●] or, if such court does not have subject matter jurisdiction, the [●●], and each Party hereby waives any objection to the exercise of that jurisdiction. Each Party agrees that a final judgment in any such suit, action, or proceeding shall be enforced in other jurisdictions.

Sample Guidance for Arbitration Clause and Choice of Forum

In an MSA it is essential to incorporate an article specifying how disputes arising out of the agreement or any contemplated transactions will be resolved. Without such a provision, the parties may be left uncertain about where and how to bring claims against one another if a dispute arises. This uncertainty can lead to costly and time-consuming legal battles, as the parties may need to first litigate what is the appropriate forum before even addressing the substance of their dispute.

While the absence of a dispute resolution provision does not necessarily mean that a dispute will arise, having one in place at the outset can provide valuable clarity and predictability. If a dispute does arise, a well-drafted dispute resolution clause can help streamline the process and potentially save the parties significant time and expense. 

To address this issue, consider negotiating the inclusion of a dispute resolution provision that specifies either (1) the courts that will have exclusive jurisdiction over any disputes, or (2) that any disputes must be resolved through binding arbitration. If the parties agree to arbitration, the provision should also specify the applicable arbitral rules and the location of the arbitration.‍

Example Alerts That AI Contract Review May Flag:

• May be missing an article specifying that any suit, action, or proceeding arising out of this agreement or any contemplated transactions shall be submitted to a court of jurisdiction or settled by arbitration.
• May be missing language specifying the court where the parties will submit any suit, action, or proceeding arising out of this agreement.
• May be missing language specifying that any dispute arising out of this agreement shall be settled by arbitration administered in accordance with the specific arbitration rules mentioned herein.
• May be missing language specifying the place of arbitration for any dispute arising out of this agreement.
• May be missing language specifying that any dispute arising out of this agreement shall be settled by the specific number of arbitrators mentioned herein.
• May be missing language specifying that any arbitration proceeding arising out of this agreement shall be settled in the specific language mentioned herein.
• May be missing language specifying that the arbitration award for any dispute arising out of this agreement shall be final and binding on the parties.
• May be missing language specifying how the parties intend to handle the costs of arbitration and the recovery of attorneys' fees.

Simplifying Your Arbitration Clause Negotiations with AI

AI-powered tools like LegalOn can help legal teams:

1. Quickly spot important issues
2. Give alerts based on your situation
3. Suggest improvements
4. Ensure you're following relevant laws

The sample AI-powered insights we've shared demonstrate how LegalOn can enhance your contract review process, making it more efficient, thorough, and aligned with best practices.

To experience the power of AI in Arbitration clause negotiations, we invite you to see it in action. Book a demo today to explore how our AI-powered contract review software can transform your approach to drafting and negotiating Arbitration clauses.