It is very common to draft an arbitration clause to apply only to certain types of disputes—but usually a mistake to do so. If the parties want arbitration for certain issues, they would be well advised to consider arbitration for all of them.

A typical “limited subject matter” arbitration clause might read:

“Any controversy or claim arising out of or relating to this contract or the breach thereof that concerns [tax obligations, intellectual property rights, employment issues, purchase price adjustments, etc.] shall be resolved by binding arbitration.”

The thinking behind this type of clause is that it is worth sacrificing the protections of full-blown litigation—including robust discovery, the right to a jury trial and to appeal an adverse judgment—only for certain types of disputes requiring particularized expertise by a decision-maker or confidentiality.

While perfectly sensible in theory, these types of clauses tend to create a tremendous amount of collateral litigation about the arbitrability of a dispute. In particular, the party seeking to invoke a limited subject matter arbitration clause will often face one of two responses: the adversary will either (i) commence a litigation and seek to stay the arbitration on the basis that the dispute does not fall within the clause, or (ii) object in the arbitration proceedings to the arbitrability of the dispute, proceed to participate in the arbitration, and then, if not satisfied with the result, commence a litigation seeking to have the arbitration award vacated on the basis that the panel did not have authority to decide it.

The latter approach was sanctioned by the U.S. Court of Appeals for the Third Circuit in China Minmetals Materials Import & Export Co. v. Chi Mei Corp. (3d Cir. 2003). When successfully invoked, this strategy results not only in the vacatur of an award, but in the adversary actually getting “two bites at the apple.”

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