The Federal Arbitration Act, as we noted last time, is an important law in that it applies to all contracts involving interstate commerce, both in state and federal court. The Federal Arbitration Act preempts state laws which are inconsistent with its provisions.
It is important to realize, though, that the FAA does not necessarily dictate the procedural rules determining how to conduct arbitration. Rather, it is up to the parties to either lay out their own procedural rules or elect to apply the rules set forth in state law or the FAA. Businesses need to carefully consider this point and determine what procedural rules they will adopt in the context of arbitration agreements they negotiate.
Drafting an effective arbitration agreement, like any contract, requires an understanding not only of the applicable law, but also a practical sense of what contingencies the agreement is addressing. Clear and definite language, attention to the transaction underlying the arbitration agreement, provision of sufficient—but not overly specific or unrealistic—details, and equity between the parties are all to be kept in mind when drafting arbitration agreements.
Another important thing to remember about arbitration agreements is that they are essentially a promise to resolve disputes outside court. For this reason, arbitration agreements should not seek to mimic the procedural rules used in the courtroom. To do so would involve unnecessary expense and make arbitration a less effective alternative to litigation.
For businesses, arbitration agreements can be an effective way to ensure disputes are resolved outside court, but this requires careful thought in drafting and negotiating the terms of the agreement. Businesses can help ensure their arbitration agreements are effective by working with an experienced business law attorney.
Adr.org, “Drafting Arbitration Clauses: Avoiding the 7 Deadly Sins,” John M. Townsend, 2003
American Bar Association, “Preemption and the Federal Arbitration Act” What Law Will Govern Your Agreement To Arbitrate?” Stephen Smerek and Daniel Whang, Accessed March 21, 2016.