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    Article

    Key considerations for effective arbitration clauses

    Dec 5, 2024

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    By Elizabeth Meraz and Valerie MontaguePhilip Cramer (Legal Intern—Healthcare practice) assisted with the preparation of this article.

    Carefully drafted arbitration clauses may help avoid expensive and time-consuming litigation in the future. 

    Healthcare entities must enter into a range of contracts to effectively deliver care. Contracts, such as those involving medical supplies, physician agreements, equipment sales and/or leasing, and real estate, require the negotiation of many important business and legal provisions. While the vast majority of an organization’s contractual arrangements are unlikely to give rise to a major dispute between the parties, dispute resolution clauses are material and the parties should go beyond the boiler plate to ensure they are well-positioned in the event dispute resolution becomes necessary. Robust and clearly articulated dispute resolution clauses can help avoid costly litigation in the future.

    Benefits of healthcare arbitration

    As defined by the American Arbitration Association (AAA), arbitration is an “out-of-court resolution of a dispute between parties to a contract” that is decided by an impartial authority, referred to as the arbitrator. In other words, arbitration is a private forum for dispute resolution in which the arbitrator(s) review and weigh evidence before rendering a binding decision. The benefits of choosing arbitration as opposed to litigating in court include efficiency and confidentiality. Arbitration is more efficient due to simplified and more flexible procedures for admitting evidence and conducting discovery, resulting in quicker decisions that generally cost less. Additionally, arbitration results in a private resolution, which better protects the confidentiality of parties and terms, while court cases are part of the public record.

    The importance of effective arbitration clauses

    For organizations that wish to resolve potential disputes through arbitration, it is important to know the resources available for drafting such clauses. Pre-written clauses from Judicial Arbitration and Mediation Services, Inc., better known as JAMS, provide a great starting point for drafting arbitration provisions. Examples include:;

    STANDARD ARBITRATION CLAUSES

    While a standard arbitration clause does not provide specific procedures for any future arbitration, it ensures that future disputes will be arbitrated.

    GOVERNING LAW

    Contracting parties should decide the preferred governing rules for arbitration. The US Supreme Court held that the Federal Arbitration Act (FAA) does not automatically govern over a state’s arbitration act with respect to interstate disputes when the parties otherwise agreed to state governing law. Consequently, a contract should specify whether the FAA or the state-specific governing rules will apply to arbitration.

    PUNITIVE DAMAGES

    To clarify the ability of an arbitrator to award punitive damages, an arbitration clause should describe what the arbitrator is empowered to do when awarding damages.

    ARBITRATOR QUALIFICATIONS

    Depending on the arrangement, it may be important for a party to have an arbitrator with specific knowledge (e.g., pharmaceutical or engineering expertise). In addition, a party may benefit from an arbitrator who has been in practice for at least a specified number of years, or who has specific experiences (e.g., a judge from a particular jurisdiction). When drafting language on specific arbitrator qualifications, organizations should avoid narrowing the required qualifications so far that the number of available, competent, and qualified arbitrators becomes too limited.

    CONFIDENTIALITY

    It is a standard practice for arbitration forums to keep the process confidential. To the extent a contracting party desires to impose further confidentiality obligations in an arbitration, this should be specifically described in the contract language.

    LIMITATION OF LIABILITY

    Similar to a punitive damages clause, organizations seeking to require arbitration should consider specific language to limit the arbitrator(s)’s authority to award incidental, indirect, or consequential damages.

    APPEAL

    Although arbitration awards are reversed in very limited situations (a non-exhaustive list of examples includes prejudice, fraud, corruption, and acts exceeding the arbitrator’s powers), language can be added to an arbitration clause allowing a party to appeal a decision to a second set of arbitrators. The clause can set forth specific procedures for the appeal, such as the number of arbitrators to be used and a process as to how the parties select the new arbitrator(s). Conversely, the parties may choose to limit appeals and indicate that the arbitrator’s decision is final and binding.

    Best practices for including contractual arbitration provisions

    While the leading arbitration services organizations provide starting points to contractual arbitration provisions, consulting with attorneys who have arbitration experience can provide healthcare entities with battle-tested best practices. For example, for high-value disputes, organizations should strongly consider adding a contractual requirement for three arbitrators if a claim value threshold is met. Additionally, in situations where only one arbitrator is used, an organization may consider including more specific criteria for arbitrator selection such as specific experience or exposure to disputes in related subject matter.

    Nixon Peabody attorneys are actively involved in healthcare-related arbitration and are happy to assist in crafting effective arbitration provisions and strategies. For more information on the content of this article, please contact your Nixon Peabody attorney or the authors of this alert.

    Practices

    HealthcareHealthcare Dispute ResolutionArbitration, Mediation & Alternative Dispute Resolution

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    Healthcare

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    The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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