Choosing the Rules of Arbitration

In DIRECTV, Inc. v. Imburgia, — U.S. —, 136 S. Ct. 463, 468 (2015), an arbitration case, Justice Breyer wrote the opinion of the Court and referred to the broad latitude of the parties in deciding which rules to apply to an arbitration agreement:

“As the Court of Appeal noted, the Federal Arbitration Act allows parties to an arbitration contract considerable latitude to choose what law governs some or all of its provisions, including the law governing enforceability of a class-arbitration waiver. … In principle, they might choose to have portions of their contract governed by the law of Tibet, the law of pre-revolutionary Russia, or (as is relevant here) the law of California including the Discover Bank rule and irrespective of that rule’s invalidation in Concepcion.”

While it is possible to agree to use the law of Tibet or of Czarist Russia in arbitrating a case, I have never had a party express interest in the possibility.

Fairly often, arbitration agreements do not specify the rules to be followed.  In my Case Management conferences, I try to get agreement on the rules.  The AAA, AHLA, and JAMS rules are fairly thorough, and reflect a lot of effort to create fair and impartial handling of cases.  It is wise to agree to one of these sets of rules, and not to develop a new set.

There are major risks in the enforceability of arbitration agreements when only one of the parties has drafted the rules.  The temptation to build in an advantage for the party drafting the agreement is sometimes too great to resist.  For a cautionary tale where everything was done wrong, see Hooters of America, Inc. v. Phillips, 39 F.Supp.2d 582 (D.S.C. 1998), aff’d, 173 F.3d 933 (4th Cir. 1999).  Judges are much more comfortable enforcing arbitration clauses where the rules were drafted by a reputable entity like the American Arbitration Association.

Like most arbitrators, I will not agree to arbitrate a dispute under a set of rules that puts any party at an unfair disadvantage.

Occasionally, I have been asked not to use any rules at all, but simply to use my good judgment.  This tends to happen when the parties primarily care that the matter be resolved fairly, cannot agree, and have a much lesser concern whether the matter is resolved correctly.  They want to get rid of the dispute with something more than a coin toss but without spending much more effort, and move on.  That can be done, and I’ve done it with the parties stipulating in a writing specific to the dispute that they would abide by the result.