What's involved in arbitration?

A company representative raised the following topic: We are a subcontractor on a large government contract. Our subcontract states that any disputes that we may have with the prime contractor must be submitted to arbitration before we can initiate a court action against the prime contractor. What procedures apply to arbitration cases?

Many contracts between private parties include an arbitration clause under which the companies agree to submit their disputes to one or more arbitrators. Because subcontracting arrangements under government prime contracts essentially are commercial transactions to which the government itself is not a contracting party, it is not uncommon to see arbitration clauses in subcontracts.

Sometimes an arbitration clause will be crafted narrowly to address only certain types of disputes. However, most are written broadly to encompass all of the disagreements that the parties may have during contract performance. The American Arbitration Association, one of the largest organizations in this field, encourages companies to use a broad arbitration clause. The standard AAA provision for commercial agreements states: "Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its commercial arbitration rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof." [See "Drafting Dispute Resolution Clauses—A Practical Guide" (1994). Available at www.adr.org/rules/guides/clausebook.html.]

Historically, many courts interpreted arbitration clauses narrowly because they were viewed as limiting a party's right to seek judicial redress for wrongs they may have suffered. However, the Federal Arbitration Act, 9 U.S.C. & Sect;& Sect; 1-16, was passed "to reverse the longstanding judicial hostility to arbitration agreements...and to place arbitration agreements upon the same footing as other contracts," as found in Gilmer v. Interstate/Johnson Lane Corp. [500 U.S. 20, 24 (1991)]. Most states have passed similar laws.

Since the passage of the Federal Arbitration Act, most courts will presume that a dispute is within the scope of a contract's arbitration clause unless there is good reason to the contrary. [See, for example, ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1462 (10th Cir. 1995).] This presumption may be overcome only if "it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." [Id. See also Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983).] Even most statutorily based claims are likely to be encompassed by a broadly written arbitration clause. [See, for example, Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).]

An agreement to submit a statutorily based claim to arbitration does not change the parties' substantive rights or the applicable law. However, it changes the forum and procedures through which the substantive issues will be determined. (See Gilmer v. Interstate/Johnson Lane Corp., noted above). What procedures are to apply will depend on the terms of the specific arbitration agreement at issue.

If the parties have agreed to follow the AAA's standard commercial arbitration rules, for claims of less than $50,000, the AAA's "expedited procedures" ordinarily will be applied.

For larger, more complex cases, arbitrators normally conduct a preliminary hearing to schedule the production of relevant documents and other information, identify witnesses and schedule further proceedings to resolve the case. Also, the submission of factual statements, the specification of claims and counterclaims, the stipulation of uncontroverted facts, exchanges of information and reports (including reports from experts), witness lists and outlines of expected testimony, hearing procedures and other materials are addressed.

In some cases, these hearings are conducted in writing, but usually they are done in person or on the phone. After the first preliminary hearing, the rest of the case proceeds along the grounds decided by the arbitrators, subject to revision to keep the case moving efficiently.

An arbitration proceeding can be every bit as involved, complicated and lengthy as an ordinary court case. Nevertheless, many companies routinely include arbitration clauses in their commercial contracts because they believe that arbitration will be more economical and efficient than ordinary court proceedings. As reflected in the discussion above, anyone who agrees to such a provision likely will be held to that agreement in any subsequent dispute.

--Peckinpaugh is a member of the government contracts section of the law firm Winston & Strawn, Washington, D.C. This column addresses legal topics that arise in government acquisition and management of ADP resources. Readers are encouraged to submit topics by e-mail to carl@carl.com.