Commercial Arbitration: How To Secure It – or Avoid It – in US State and Federal Court
Travis Mock, counsel at Rakower Law PLLC, discusses commercial arbitration: how to secure it, how to avoid it, and how to ensure arbitration clauses in contracts align with parties’ dispute resolution expectations.
Travis Mock
View firm profileThe Role of Arbitration in Commercial Disputes
Arbitration serves as an intermediary between mediation and litigation, offering some of the benefits of both. Like mediation, it is private and customisable, but like litigation, it delivers a formal process with some scope for discovery and a binding decision. Arbitration is generally more efficient and cost-effective than litigation, though Mock cautions that improper structuring can make it costly.
Why Arbitration Is Frequently Litigated
Despite its popularity, arbitration is often the subject of litigation. Parties must explicitly agree to arbitrate a particular type of dispute. However, parties sometimes develop “buyer’s remorse” and seek to litigate instead – often due to the confidentiality of arbitration or the limited discovery it allows compared to court proceedings. These disagreements frequently result in legal battles over whether arbitration should apply.
“Arbitration is a creature of contract. If it’s not clearly agreed upon, expect litigation.”
There are three main elements in arbitration clauses that frequently lead to disputes:
- whether the parties agreed to arbitration at all – some contracts lack clarity, leading to disputes over enforceability;
- whether the arbitration clause covers the specific dispute at hand – some contracts exclude certain types of disputes, creating ambiguity; and
- where arbitration should take place – jurisdictional issues can arise when contracts fail to specify a location.
Mock notes that by default, courts determine these issues unless the arbitration clause explicitly grants that power to an arbitrator.
How to Compel or Avoid Arbitration
If arbitration is governed by the Federal Arbitration Act (FAA), a party seeking to arbitrate can:
- file a motion to stay litigation if a lawsuit has been initiated; and
- file a petition to compel arbitration if the counterparty refuses to participate.
Federal courts strongly favour arbitration, often interpreting the FAA to support arbitration even more than the plain text of the stature might require. In Coinbase v Bielski, a recent US Supreme Court decision, the court held that litigation should be stayed while arbitration appeals are resolved, protecting parties from having to litigate while they challenge a denial of arbitration.
“The Supreme Court has been expanding protections for arbitration – understanding these rulings can make or break a case.”
If state rather than federal law governs arbitration, the process varies by jurisdiction. Mock noted that while many state courts historically resisted arbitration, most now recognise its legitimacy and have adopted protections similar to the FAA.
Strategic Considerations for Arbitration and Drafting Effective Arbitration Clauses
Mock offers strategic advice for enforcing arbitration:
- CPLR Article 75 – In New York, he recommends serving a Notice of Intention to Arbitrate under CPLR Article 75. This prevents post-arbitration challenges by requiring all threshold objections to be raised at the outset.
- Forum selection matters – Different courts have varying degrees of support for arbitration. Seeking expert counsel can help ensure a favourable venue.
- Jurisdictional manoeuvring – If litigation is initiated in an unfavourable jurisdiction, parties may need to move it to a court that can enforce arbitration.
“A well-drafted arbitration clause is an investment – get it right, and you avoid costly disputes down the road.”
He also provides three key tips for drafting arbitration clauses that prevent disputes.
- Clearly define the scope of arbitration – Decide whether all disputes or only specific types should be arbitrated.
- Specify key arbitration features – Define the arbitration forum (eg, JAMS, AAA), governing rules, location and whether arbitrability disputes will be decided by courts or arbitrators.
- Prioritise efficiency – Avoid excessive costs by using a single arbitrator instead of a panel, opting for expedited procedures when possible and avoiding optional appeals that add complexity.
While arbitration offers many advantages, it requires careful planning. Poorly drafted clauses can lead to litigation rather than avoiding it. By drafting with clarity and strategy, businesses can ensure arbitration serves its intended purpose.
Rakower Law PLLC
