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Drafting arbitration clauses.

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Drafting Arbitration Clauses
By JohnJ. Bouma and
Cassie Wehling
The 7th US. Circuit Court of Appeals
has addressed two issues that affect the
use of arbitration clauses in commercial
contracts: incorporation by reference
of the duty to arbitrate, and giving notice of an arbitration proceeding.
The plaintiff, Gingiss International,
Inc., entered into afranchise agreement
with H-K Formalwear Corporation calling for arbitration of all disputes. In a
separate contract with Gingiss, H-K
shareholders agreed to be bound by
all obligations of H-K under the franchise agreement-as if each shareholder were the franchisee. The
shareholders’ agreement did not contain an arbitration clause.
After the franchise agreement expired, Gingiss claimed that H-K and
the shareholders had breached it, and
violated rules against trademark infringement and unfair competition.
Gingiss demanded arbitration. Neither
H-K nor the shareholders replied to
the various notices that the franchisor
sent them, or appeared at the arbitration. The arbitrator entered awards
against H-K and the shareholders.
The federal district court confirmed
the awards on motions for summary
judgment. On appeal, the H-K shareholders claimed that the arbitrator had
nojurisdiction over them because they
were not parties to the franchise agreement and because their own agreement with Gingiss did not contain an
arbitration clause. The catch: this separate agreement expressly incorporated
the franchise agreement by reference.
Therefore, the 7th Circuit upheld
the arbitrator’s awards against the individual shareholders. Under federal
law, a subcontract with a guarantor may
incorporate by reference a duty to arbitrate contained in the underlying
contract, the court said.
The H-K shareholders also argued
that mailing notices of the arbitration
by regular mail to their last known addresses did not constitute proper noJohnJ Bourna, a member of the Altmatives
editm.al board, is apartner at SnellH Wilmer
in Phoenix. Cassie Wehling is an associate at
thef i r m and a member of its ADR committee.
Vol. 14, No. 1 January 1996
CPR Institute for Dispute Resolution
tice. Although the notice compliedwith
the American Arbitration Association
rules (incorporated by reference into
the arbitration clause), the sh&eholders argued that they were entitled to
notice by registered or certified mail.
They cited a general notice provision
in the franchise agreement and the
notice requirements of California law
(incorporated into the franchise agreement through the choice-of-law provision). The 7th Circuit held that notice
by regular mail was sufficient since the
arbitration clause and the rules incorporated in it control all aspects of the
arbitration.
The lessons: 1)Guarantorswho don’t
want to be bound by a duty to arbitrate
set forth in the underlying contract
must expressly exclude that duty from
the duties they assume. 2) When drafting an arbitration clause, remember
that the procedural rules it incorporates will govern the type and sufficiency of notice required for the
arbitration. Other potentially applicable sections of the contract will not
govern the arbitration proceeding
unless the arbitration clause explicitly
incorporates them.
Gingiss International, Inc. u. Bormet, 58
E3d 328 (7th Cir. 1995).
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Monsanto Company
John J. Bouma
Snell0.’ Wilmer
Jamie Broder
Paul, Hastings,Janofky 0.’Walker
Paul D. Carrington
Duke University School of Law
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Cathy A. Costantino
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Monsanto Company
Laura Effel
Chase Manhattan Bank, N.A.
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EdwardJ. Lynch
Exxxon Corporation
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