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Negotiating Telecommunications User Deals:
Structuring Arbitration Clauses & Resolving Disputes

Date: Sep 22, 2003


HOW TO ASSESS CARRIER DEMANDS FOR LIMITATIONS ON DAMAGES

Generally, carriers in telecommunication user agreements do not want traditional damages. Limitations on liabilities, such as caps on damages, should be reasonably defined so that users, especially those who are at a bargaining disadvantage, do not contract away their right to be compensated for their damages.

WHEN TO ESCALATE CHRONIC SERVICE OR BILLING ISSUES TO DISPUTE RESOLUTION.

Non-material breaches frequently arise during the course of the relationship between carrier and user. This category of disputes is generally excluded from the arbitration clause in favor of more informal methods of resolution. A problem may arise, however, if the frequency of non-material breaches is so great that, when viewed in the aggregate, those disputes amount to a material breach. It is important for the drafter of the arbitration clause to carefully consider the implications of excluding certain disputes from arbitration, and/or qualifying those exclusions so that once a threshold of repeated non-material breaches are committed, arbitration is still an option. A few of the typical disputes arising out of telecommunication user agreements that may cause this type of problem are:

  • Billing
  • Inadequate or untimely provision of services
  • Problems at one or two, out of many, locations where services are provided

ARBITRATION OR LITIGATION?


  • When is arbitration appropriate?
    During the course of performance of the telecommunications user agreement, disputes between carrier and user may arise. Thus, in order to effectively structure an arbitration clause, it is important to keep in mind the pros and cons of arbitration verses litigation. The following are a few considerations to consider:

    • Pros of Arbitrating Telecommunication User Agreement Disputes
      • Typically more efficient and less costly than litigation
        Efficiency is gained through informality of procedural and evidentiary rules, as well as, in most cases, limited discovery.
      • Arbitrator is usually an expert in telecommunications, thereby eliminating the costs of educating a judge or jury on the factual intricacies of telecommunication users agreements.
      • Because the parties Telecommunications user agreements Because telecommunication user agreements have such clearly defined terms, disputes are generally narrow and do not require the trappings of a traditional court room to resolve.
    • Cons
      • Arbitral decisions normally rendered without an opinion. The parties generally remain unaware of the rationale for the arbitrator's decision.
      • Experts chosen by the parties for their familiarity with the issues may not be experts in the law, and they are not bound to follow the law at all.
      • Limited discovery prevents each party from developing the facts necessary to effectively tell their respective "sides of the story".
      • Judicial review of arbitral decisions is limited and extreme deference is generally given to arbitrators.
    • Size Does Matter
      When evaluating whether arbitration clauses in telecommunication user agreements will be used, as well as the terms contained therein if the contract uses one, it is essential to evaluate the relative bargaining power of each party. At one extreme, where the size of the user pales in comparison to the carrier or service provider, the arbitration clause, and its terms, will likely be standard, non-negotiable boiler-plate. At the other extreme, where the carrier and user are equally sized players, the inclusion of an arbitration clause, as well as its terms, are all negotiable. Determining where the parties fall on this continuum is essential prior to drafting the arbitration clause.

HOW SHOULD ARBITRATION CLAUSES BE STRUCTURED.

Arbitration leaves such matters as the scope of issues, location, remedies, timing, choice of law and choice of arbitrator to the discretion of the parties. Some of the important considerations to consider when structuring an arbitration clause are:
    • Who will conduct the arbitration?
      The agreement may set forth the number of arbitrators and the method of selection. Although the arbitration clause can identify an arbitrator, more often it sets a method of selection. Professional organizations, such as the American Arbitration Association ("AAA") have a predetermined process of selection.
    • What will the rules be?
      Generally, the agreement will adopt a pre-existing set of rules such as those of the AAA. The parties can agree to be controlled by those rules even if the arbitration is not being conducted under the auspices of the AAA.
    • Where will the arbitration take place?
      The enterprise staff likely will participate in the arbitration. More often than not, customers initiate arbitration proceedings. To minimize disruption, the site of the arbitration should be in the metropolitan area or city where the enterprise has its principal place of business.
    • What may be arbitrated?
      Arbitration generally occurs where there has been a material breach of the contract. The parties need not agree to arbitrate every possible disagreement that could arise under the agreement. Typically, the arbitration clauses in telecommunication services agreements are intended to be inclusive with carve-outs for disputes for which injunctive relief is appropriate or necessary. Minimum amounts in dispute for invoking arbitration should be avoided.
    • Will discovery be allowed?
      An important consideration is whether there will be discovery as a matter of right, no discovery or discovery at the discretion of the arbitrator. The availability and scope of discovery impact both the cost and length of arbitration. The issue regarding discovery is whether depositions, document requests and/or interrogatories will be allowed.
    • Confidentiality of proceedings
      The arbitration clause should specify whether the arbitration proceedings, and/or the results of such proceedings are to be kept confidential. Generally, carriers do not want the arbitral proceedings to be a matter of public record because the frequency of disputes could impact the carrier's bargaining power when negotiating future contracts with different users.
    • Who pays?
      Generally, arbitration clauses provide that the parties split the costs of arbitration and each party pays its own attorney's fees. However, fee shifting is an option. The parties may agree that the loser pays for the costs of the arbitration, including attorney's fees, or only in circumstances determined by arbitrators.

For additional information on on this article, please contact Doug Behr at behr@khlaw.com, or via telephone at 202-434-4213.