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Maritime Law: Limited Subject Matter Arbitration Clauses Do Not Avoid Arbitrability Disputes

Lately, I have been seeing contracts containing arbitration clauses that apply to only certain types of disputes. In the latest case I was asked to consult on, this proved to be initially disastrous. Luckily, the parties were willing to work through the dispute (because they were currently negotiating a joint venture) and I helped (in a small way) to guide them through what was initially a potentially disastrous situation. It has been my experience with arbitration clauses that if the parties want arbitration for certain issues, they are well advised to consider arbitration for all of them.

A typical limited subject matter arbitration clause might read as follows:
 
“Any controversy or claim arising out of or relating to this contract or the breach thereof that concerns [regulatory issues, tax obligations, etc.] shall be resolved by binding arbitration.”
 
The thinking behind this type of clause is that it is worth sacrificing the protections of full-blown litigation—including robust discovery, the right to a jury trial and to appeal an adverse judgment—for certain types of disputes requiring particularized expertise by a decision-maker or confidentiality. While perfectly sensible in theory, these types of clauses tend to create a tremendous amount of collateral litigation about the arbitrability of a dispute. In particular, the party seeking to invoke a limited subject matter arbitration clause will often face one of two responses: the adversary will either (i) commence a litigation and seek to stay the arbitration on the basis that the dispute does not fall within the clause; or (ii) object in the arbitration proceedings to the arbitrability of the dispute, proceed to participate in the arbitration, and then, if not satisfied with the result, commence a litigation seeking to have the arbitration award vacated on the basis that the panel did not have authority to decide it.

Challenges likewise await the party that commences litigation on the basis that a dispute falls outside the scope of a limited subject matter arbitration clause. In that situation, an adversary will often move to stay the litigation and to compel arbitration. If that motion is denied, the moving party has an immediate right of appeal under Section 16 of the Federal Arbitration Act and, pending the appeal, can stay the litigation. That could easily add more than a year to the dispute process—before the parties even begin to address the merits of the dispute itself.

Because of these issues, it is often preferable to entrust all disputes to arbitration or to litigation, not to some combination of the two. Anything else will often invite forum shopping by an adversary and add significant expense and delay—exactly the opposite of what was sought when the parties agreed to arbitration in the first place.
 
To this end, Miami has been chosen as the host city for the 2014 global meeting of the International Counsel for Commercial Arbitration. The event is expected to draw about 1,000 attorneys from around the world and further highlight Miami's growing role as a center for international business arbitration. Miami has traditionally ranked behind only New York as a center for international arbitration, especially for cases related to Latin America.
 
If you are interested in contacting me, please do not hesitate to do so at mov@chaloslaw.com.

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