Editor’s note: This article describes a hypothetical situation.
Bob may be interested in the theoretical issues of the law. His clients? They want results. But they do not want to pay a bundle to get those results. Merely winning a case may not cut the mustard if they have to pay an arm and a leg for the victory — and wait years to boot.
Take Bob’s recent "victory." Bob’s client, P Squared, is the exclusive distributor in the United States of key chains that D Chain Ltd. manufactures. P Squared got more than a little miffed when D Chain started selling its key chains to P Squared’s competitors in the United States. "What about the exclusivity provision?" Bob could not get an intelligible response from D Chain’s legal department to that question. That left one option for P Squared: suing. Luckily, for Bob anyway, P Squared’s president reminded Bob that the distribution agreement had an arbitration provision and that the parties had agreed to arbitrate any claims arising out of the agreement. "Don’t you remember, Bob? You told me that arbitration was fast, efficient and cheaper than litigation."
With that nudge, Bob filed an arbitration demand with the agreed-upon arbitration provider. The parties selected an arbitrator. After just a few months of discovery, the parties had a three-day hearing in Philadelphia. Ten days later, a total victory. The arbitrator’s award: "I conclude that D Chain Ltd. breached the distribution agreement. P Squared is entitled to recover its lost profits, in the amount of $685,000."
After waiting 45 days, Bob filed a petition in the U.S. District Court for the Eastern District of Pennsylvania to confirm the "final" arbitration award and to enter judgment on the award. As Bob explained to his client, "D Chain will not pay a penny until the folks there are facing a judgment and the risk that D Chain’s assets will be seized."
Then the boom began to fall. D Chain vigorously opposed the petition to confirm the arbitration award. Basis? "There was not a final award and the parties never agreed that ‘judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.’" D Chain argued that the governing statute, Section 9 of the Federal Arbitration Act, 9 U.S.C. § 9, permits the entry of judgment on an arbitration award only if the parties have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration. D Chain asserted that Bob’s arbitration provision did not state that judgment upon the award could be entered in a court having jurisdiction. Therefore, D Chain concluded, the award is not binding and "prevailing party" P Squared cannot enforce the award: "Section 9 of the Federal Arbitration Act does not permit confirmation of an arbitration award without the written agreement of the parties and the P Squared-drafted arbitration provision does not mention confirmation of anything."
How did Bob miss the "magic language"? And what is he going to say in response to his client’s complaint: "If the award is not binding and P Squared is not able to enforce the award, wasn’t the arbitration proceeding a waste of time and resources? Do we have to start all over from square one?"
There are two lessons here. One lesson even will allow P Squared, through its new attorney, to get what it really wants — an enforceable award that can be turned into a judgment.
First, the simple lesson. If your client is like most clients, it is not going to arbitration for the sheer joy of the process or to find out what an arbitrator "thinks" about the case. Your client wants results — a final arbitration award and a judgment. To avoid Bob’s mistake, the arbitration clause unambiguously should provide that the dispute "shall be finally determined by one arbitrator [or more arbitrators, if the parties agree] and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof." Bob missed this one and it is amazing how many contract drafters make the same mistake.
There is a second lesson that would have saved Bob. Arbitration agreements often provide that the parties shall have an "administered" arbitration. This means the parties agree to submit their dispute to a third-party arbitration provider. Those providers customarily have internal rules that say the parties "shall be deemed" to have made the rules a part of their agreement. Further, the now-incorporated rules say that the parties "shall be deemed" to have consented that judgment on the arbitration award may be entered in any court having jurisdiction thereof. The bottom line: The parties accomplish indirectly — agreeing that "judgment upon the award may be entered in any court having jurisdiction thereof" — what they failed to do directly.
This incorporation-of-the-magic-language provision has saved many Bobs out there. One Bob saved his hide in a recent California state court case, Swissmex-Rapid S.A. de C.V. v. SP Systems LLC, 212 Cal. App. 4th 539, 549, 151 Cal. Rptr. 229, 237 (2012), where the court said, "In sum, the parties agreed to arbitrate pursuant to the Commercial Arbitration Rules [of the American Arbitration Association]. With the Commercial Arbitration Rules incorporated into the parties’ agreement, the parties are deemed to have consented to entry of judgment upon an arbitration award."
Swissmex-Rapid S.A. is no outlier. The U.S. Court of Appeals for the Second Circuit likewise held in Idea Nuova v. GM Licensing Group, 617 F.3d 177, 181 (2d Cir. 2010), that, "With these [American Arbitration Association] rules incorporated into the parties’ agreement … we reject [respondent's] argument that it never agreed to binding arbitration or to the court’s jurisdiction to confirm arbitral awards." (See also Wells Fargo Advisors v. Lopez, 2012 U.S. Dist. LEXIS 17252, *6 (C.D. Cal. Feb. 10, 2012) ("Most courts have held that the power to confirm the arbitration award need not be expressly conferred by the parties in the agreement. Instead, a provision that the arbitrator’s award shall be binding on the parties impliedly confers power on a court to enter judgment thereon.").)
As a vindicated Bob told P Squared’s president recently, "You should have had faith. It was a winner the whole time. Why did you have to get replacement counsel?"
The former client’s response: "All you had to do was say ‘judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.’ Your omission had real consequences. Instead of getting an immediate judgment, my lawyers spent more than a year in motion practice. And my company spent thousands of dollars to vindicate you." •
Charles F. Forer is a member in the Philadelphia office of Eckert Seamans Cherin & Mellott, where he practices all types of alternative dispute resolution, both as a neutral and as counsel to parties engaged in ADR. He is a former co-chair of both the Philadelphia Bar Association’s alternative dispute resolution committee and the fee disputes committee. He is a frequent lecturer and writer on the use of ADR in a variety of settings. You can reach him at 215-851-8406 and email@example.com.