The Pitfalls of Arbitration Administrator Rules

This clause, stating clearly that all franchise disputes are arbitrable, reduces the possibility that any disputes will wind up in court. Even better, this clause provides the rules and procedures that will govern the dispute. Inserting just 10 words ' “in accordance with the rules of the XYZ Arbitration Association” ' avoids the need to draft rules pertaining to venue, arbitrator-selection, discovery, evidence, motion practice, remedies, confidentiality, and all of the other procedural provisions that expert practitioners, like Bob, consider when writing an arbitration agreement.

What's Wrong With This Clause?

It was not long before Bob's franchisor client had a dispute with a franchisee. Bob counseled his client to hang tough in settlement negotiations because, as Bob promised, “any resulting arbitration would be quick, efficient and cost-effective.”

The franchisee likewise played hardball. Result: The parties could not settle their dispute.

In his next step, Bob drafted an arbitration demand and submitted it to the XYZ Arbitration Association. “In a matter of days,” Bob told his client, “we will be before an expert arbitrator who will set firm discovery deadlines and a prompt hearing date. This whole thing will be over in a few months. Isn't arbitration a great way to resolve disputes?”

Except for one thing: The franchisee responded, not with an answer to the arbitration demand, but with an objection to having the XYZ Arbitration Association do anything. To top matters off, the franchisee marched into court seeking to enjoin the arbitration proceeding. Bob was besieged, on numerous fronts, as he sought to arbitrate what he thought was an arbitrable dispute in accordance with what he thought was the clear and unambiguous language of the franchise agreement.

What is going on here? How did Bob mess up?

Go back to the “expertly drafted” arbitration clause (Bob's words, not mine): “Any controversy or claim arising out of or relating in any way to this contract or the breach of this contract shall be settled by arbitration in accordance with the rules of the XYZ Arbitration Association .” The highlighted words speak only about the rules that will govern the arbitration proceeding. They do not state that XYZ, or any other organization, will administer the arbitration. As Bob knows, the parties must agree on the rules governing the arbitration process. Parties may use shortcuts, as Bob did here, to adopt in wholesale fashion any set of existing rules.

Here is the rub that Bob unfortunately missed: XYZ, any other arbitration administrator, or any individual arbitrator each can apply the XYZ rules in order to arbitrate a dispute. However, picking the applicable rules, without more, does not identify the administrator that will oversee the arbitration process. An “expertly drafted” clause must identify the rules and the organization or person who will administer the rules.

Here is what Bob should have drafted: “Any controversy or claim arising out of or relating in any way to this contract or the breach of this contract shall be settled by arbitration administered by [fill in the name of the person or organization ' but identify someone!] in accordance with the rules of the XYZ Arbitration Association.”

Consequences

By the way, what did the court decide in response to the franchisee's request to stay the arbitration that Bob filed with the XYZ Arbitration Association? Does it matter? Even if Bob had convinced the court to deny the requested stay, the franchisee could try to appeal, leading to more delay and more legal expenses. The selling point ' to Bob's client, anyway ' of the “expertly drafted” arbitration clause was savings of time and money. The clause did not come through with that pitch no matter how the court rules.

Bob's “position” probably lacks merit anyway. In Nachmani v. By Design, LLC, 2010 NY Slip Op 04847 [74 AD3d 478] June 8, 2010, a New York appellate court pithily concluded that a Bob-sounding clause ' that the arbitration would be “in accordance with the commercial rules of the American Arbitration Association” ' did not say that the AAA was the arbitration administrator and, therefore, did not provide that the arbitration could not take place before the AAA. The court found that the “[p]etitioner correctly interpreted the provision requiring that the decision be in accordance with the AAA Commercial Arbitration Rules as a choice of law rather than a forum selection clause '.”

What should Bob do if his franchisor client has an arbitrable dispute before Bob is able to revise the franchisor contracts? Should Bob submit an arbitration demand to the XYZ Arbitration Association and hope that his adversary has no interest in frustrating the proceeding? Or should Bob foresee the response ' that his adversary will oppose XYZ as administrator ' and demand arbitration without identifying XYZ or any other administrator?

It does not take an experienced arbitration practitioner to know that either alternative will get Bob into hot water. If he submits the arbitration demand to XYZ, his adversary could oppose the arbitration because “the parties did not select XYZ to be the administrator.” If he does not submit the demand to XYZ, his adversary could oppose the arbitration because “the parties intended that XYZ would be the arbitration administrator.”

Charles F. Forer is a member in the Philadelphia office of Eckert Seamans Cherin & Mellott, LLC, where he practices all types of Alternative Dispute Resolution. He is a former co-chair of both the Philadelphia Bar Association's Alternative Dispute Resolution Committee and the Fee Disputes Committee. He can be reached at 215-851-8406, and [email protected].

Bob has made his share of mistakes when it comes to drafting arbitration clauses. His excuse: “The law keeps changing and I can't instantly catch up.”

At least Bob understands that parties go to arbitration to get a final and binding award that the prevailing party can turn into a judgment. Bob therefore drafts arbitration provisions that expressly provide for the entry of judgment on the arbitration award: “Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.” Without this magic language, the “award” could end up being nothing more than an advisory opinion. When you are in a franchisor-franchisee dispute, the last thing you want is to arbitrate the dispute and wind up with an “award” that is not final, that is not binding, and that cannot be entered as a judgment.

Here is what Bob customarily includes in the form contracts that he routinely drafts for his franchisor clients: “Any controversy or claim arising out of or relating in any way to this contract or the breach of this contract shall be settled by arbitration in accordance with the rules of the XYZ Arbitration Association. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.”

This clause, stating clearly that all franchise disputes are arbitrable, reduces the possibility that any disputes will wind up in court. Even better, this clause provides the rules and procedures that will govern the dispute. Inserting just 10 words ' “in accordance with the rules of the XYZ Arbitration Association” ' avoids the need to draft rules pertaining to venue, arbitrator-selection, discovery, evidence, motion practice, remedies, confidentiality, and all of the other procedural provisions that expert practitioners, like Bob, consider when writing an arbitration agreement.

What's Wrong With This Clause?

It was not long before Bob's franchisor client had a dispute with a franchisee. Bob counseled his client to hang tough in settlement negotiations because, as Bob promised, “any resulting arbitration would be quick, efficient and cost-effective.”

The franchisee likewise played hardball. Result: The parties could not settle their dispute.

In his next step, Bob drafted an arbitration demand and submitted it to the XYZ Arbitration Association. “In a matter of days,” Bob told his client, “we will be before an expert arbitrator who will set firm discovery deadlines and a prompt hearing date. This whole thing will be over in a few months. Isn't arbitration a great way to resolve disputes?”

Except for one thing: The franchisee responded, not with an answer to the arbitration demand, but with an objection to having the XYZ Arbitration Association do anything. To top matters off, the franchisee marched into court seeking to enjoin the arbitration proceeding. Bob was besieged, on numerous fronts, as he sought to arbitrate what he thought was an arbitrable dispute in accordance with what he thought was the clear and unambiguous language of the franchise agreement.

What is going on here? How did Bob mess up?

Go back to the “expertly drafted” arbitration clause (Bob's words, not mine): “Any controversy or claim arising out of or relating in any way to this contract or the breach of this contract shall be settled by arbitration in accordance with the rules of the XYZ Arbitration Association .” The highlighted words speak only about the rules that will govern the arbitration proceeding. They do not state that XYZ, or any other organization, will administer the arbitration. As Bob knows, the parties must agree on the rules governing the arbitration process. Parties may use shortcuts, as Bob did here, to adopt in wholesale fashion any set of existing rules.

Here is the rub that Bob unfortunately missed: XYZ, any other arbitration administrator, or any individual arbitrator each can apply the XYZ rules in order to arbitrate a dispute. However, picking the applicable rules, without more, does not identify the administrator that will oversee the arbitration process. An “expertly drafted” clause must identify the rules and the organization or person who will administer the rules.

Here is what Bob should have drafted: “Any controversy or claim arising out of or relating in any way to this contract or the breach of this contract shall be settled by arbitration administered by [fill in the name of the person or organization ' but identify someone!] in accordance with the rules of the XYZ Arbitration Association.”

Consequences

By the way, what did the court decide in response to the franchisee's request to stay the arbitration that Bob filed with the XYZ Arbitration Association? Does it matter? Even if Bob had convinced the court to deny the requested stay, the franchisee could try to appeal, leading to more delay and more legal expenses. The selling point ' to Bob's client, anyway ' of the “expertly drafted” arbitration clause was savings of time and money. The clause did not come through with that pitch no matter how the court rules.

Bob's “position” probably lacks merit anyway. In Nachmani v. By Design, LLC, 2010 NY Slip Op 04847 [74 AD3d 478] June 8, 2010, a New York appellate court pithily concluded that a Bob-sounding clause ' that the arbitration would be “in accordance with the commercial rules of the American Arbitration Association” ' did not say that the AAA was the arbitration administrator and, therefore, did not provide that the arbitration could not take place before the AAA. The court found that the “[p]etitioner correctly interpreted the provision requiring that the decision be in accordance with the AAA Commercial Arbitration Rules as a choice of law rather than a forum selection clause '.”

What should Bob do if his franchisor client has an arbitrable dispute before Bob is able to revise the franchisor contracts? Should Bob submit an arbitration demand to the XYZ Arbitration Association and hope that his adversary has no interest in frustrating the proceeding? Or should Bob foresee the response ' that his adversary will oppose XYZ as administrator ' and demand arbitration without identifying XYZ or any other administrator?

It does not take an experienced arbitration practitioner to know that either alternative will get Bob into hot water. If he submits the arbitration demand to XYZ, his adversary could oppose the arbitration because “the parties did not select XYZ to be the administrator.” If he does not submit the demand to XYZ, his adversary could oppose the arbitration because “the parties intended that XYZ would be the arbitration administrator.”

Charles F. Forer is a member in the Philadelphia office of Eckert Seamans Cherin & Mellott, LLC, where he practices all types of Alternative Dispute Resolution. He is a former co-chair of both the Philadelphia Bar Association's Alternative Dispute Resolution Committee and the Fee Disputes Committee. He can be reached at 215-851-8406, and [email protected].