Tips To Drafting Effective Arbitration Clauses

September 5, 2014Articles Daily Business Review

Reprinted with permission from the September 5 issue of the Daily Business Review. (c) 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

In Basulto v. Hialeah Automotive, the Florida Supreme Court held that arbitration clauses contained in consumer contracts that were written in English and signed by Spanish-speaking petitioners relating to their purchase of a car from a dealership were unenforceable.

The Supreme Court upheld the trial court's ruling that the arbitration clauses could not be enforced because they were conflicting and unconscionable. Although the holding in Basulto was based on the particular facts and circumstances of that case, the following lessons can be taken from the decision that can assist practitioners in drafting effective and binding arbitration clauses in any contract.

Consistency is Key

If several contracts are executed for the same transaction with different arbitration clauses, there is a risk there will be inconsistencies among them, which could form the basis of a successful claim or defense that there was no "meeting of the minds" between the parties to arbitrate. When more than one contract is used, each should contain the same arbitration clause. The remaining provisions of each contract should also be reviewed to ensure that they are consistent with the arbitration clause. For example, any jury waiver clause would generally not be consistent with an arbitration clause.

Include Essential Terms

Arbitration clauses should cover the material terms of the arbitration in order to reduce the chances that a court or arbitrator will fill in the gaps or find that no arbitration agreement exists. An arbitration clause should clearly set forth (1) whether the submission of a dispute to arbitration is mandatory or optional, (2) what disputes will be arbitrated, (3) whether a court or arbitrator will decide whether the arbitration agreement is enforceable, (4) the rules that will govern the arbitration, (5) whether an institution such as the American Arbitration Association or the International Chamber of Commerce will administer the arbitration, (6) the place of the arbitration, (7) whether English or another language should be used in the arbitration (particularly where non-English speaking parties are involved), (8) the substantive and procedural law that will apply, (9) the number of arbitrators and the method in which they will be selected and (10) whether a party may seek emergency relief in court and, if so, in what jurisdiction.

Avoid Unfair Arbitration Clauses

An arbitration clause, particularly in a consumer contract, should be fair and not in favor of either party. Arbitration provisions that eliminate or unreasonably limit the rights of a party lacking bargaining power (such as a waiver of the right to seek punitive damages) or give one party too much control over the proceedings increase the risk that the agreement will be declared unenforceable by a court or arbitrator.

Be Careful With Waivers of Statutory Remedies

If the arbitration agreement limits or prevents a party from obtaining relief under a statutory claim, the party seeking such relief may pursue the statutory remedies in court. Such a result would defeat the purpose of having an arbitration agreement in the first place.

Consider Translating Agreements in Certain Situations

In situations like in Basulto where the party without leverage is not fluent in English, providing that party with copies of the agreements that are translated in their native language would provide a defense to any claims that the agreements are unenforceable due to a language barrier. Given the number of Spanish-speaking consumers in South Florida, vendors should take special precaution to ensure that they do not risk having their contracts (or pertinent provisions thereof) rendered unenforceable because they are written in English.

Avoid Rendering Legal Advice

A party should not attempt to translate, explain or interpret any arbitration clauses to the other party, particularly if they are not represented by an attorney. In Basulto, the testimony of the dealership's representatives demonstrated they did not understand and therefore could not properly explain the arbitration process to the purchasers, which confirmed the court's suspicions that there was no agreement to arbitrate between the parties.

Miscellaneous Terms

Practitioners should also include a severability clause in the contract so the court can sever any unenforceable term of the arbitration clause without rendering the entire clause unenforceable. They should also expressly state in the contract that the arbitration provision survives the termination or expiration of the contract.

Reprinted with permission from the September 5 issue of the Daily Business Review. (c) 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.