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2016 Mitigating Risk: Key Litigation Developments

Commercial Litigation: Procedural Issues >> No, Not All Arbitration Clauses Are Created Equal

April 5, 2016

Faced with the delays and burdens that often go hand-in-hand with resolving disputes in court, companies increasingly have turned to arbitration as a method of alternative dispute resolution. Not all arbitration clauses, however, are created equal. Indeed, apparently minute semantic variances can spell the difference between a three-month arbitration and a three-year court battle.

Consider these two similar arbitration clauses commonly found in commercial agreements:

  • Any dispute, claim or controversy arising out of or relating to this Agreement shall be determined by arbitration in New York City before one arbitrator.
  • Any dispute, claim or controversy concerning the interpretation or enforcement of this Agreement shall be determined by arbitration in New York City before one arbitrator.

The two clauses seem virtually identical, and the differences may not be immediately apparent upon review of a lengthy contract. The seemingly small distinctions between the clauses, however, could affect the forum in which a potential dispute is heard and, by extension, the legal costs and even the ultimate liability to which a company may be exposed.

For instance, New York Labor Law imposes liquidated damages on employers that make unlawful deductions from their employees’ wages. As such, a breach of contract action for failure to pay compensation pursuant to employment agreements also could give rise to statutory claims and associated penalties under the Labor Law. In that way, the Labor Law claim might “arise out of” or “relate to” the agreement, and yet not involve its interpretation or enforcement. The statutory claim, therefore, might be arbitrable under the first clause but not the second clause.

Although the effect of this distinction commonly would be felt in the individual employment context, it could affect arbitrability in any area of law where contractual rights intersect with statutory ones, including consumer protection, copyright, and trademark, among others.

Takeaways

  • Companies should not assume that all arbitration clauses are alike.
  • It is important to carefully review the language of arbitration clauses in contracts under consideration and to anticipate the kinds of statutory liability that could result from the contractual relationships.
  • Carefully considering the nature and wording of arbitration clauses can affect the claims that will be submitted to arbitration and those that will be reserved for the courts.

Author(s)

BRUCE M. GINSBERG
Partner
212.468.4820
bginsberg@dglaw.com
Litigation