Arbitration Clauses in LLC Operating Agreements–Some Considerations
With a business startup, oftentimes the excitement and energy can allow for one to overlook the long term considerations that might seem unthinkable in the beginning. Take for instance, a business may decide upon a simple LLC operating agreement, not anticipating the potential problems that lie down the road–like say what happens in the event of a dispute between members.
Typically, an LLC operating agreement has some form of “dispute resolution” provision. This can be simply a provision requiring mediation prior to the filing of a lawsuit between members or it can be an agreement to submit any dispute to binding arbitration. If your LLC chooses to incorporate an arbitration provision into its operating agreement, some considerations should be noted.
First, do you want your arbitration provision to be broad or narrow? According to the Colorado Supreme Court, a broad arbitration clause creates a “strong presumption” that any disputes that arise should be arbitrated. Language such as “all disputes arising out of the operating agreement are subject to arbitration” or “any dispute or controversy arising under this operating agreement shall be submitted to binding arbitration” is typically broad enough to establish a presumption that ALL disputes by LLC members were intended to proceed to arbitration. If submitting all disputes to binding arbitration is not your intention–a more narrowly tailored focus may be the better approach. However, the specific and appropriate language in a narrowly focused arbitration clause is then paramount in determining which disputes proceed to arbitration.
Next, what law applies for the arbitration? Does Colorado law apply, specifically the Colorado Uniform Arbitration Act? Or does the Federal Arbitration Act apply? If so, spell it out clearly.
Also, who selects the arbitrator? Will it be a panel? Oftentimes, each party chooses an arbitrator and those arbitrators chose another arbitrator as the final choice. However, sometimes this is not adequate because some LLC members may want to retain some power to veto this “final” choice–which can only lead to gridlock if no compromise can be found.
Finally, who decides whether issues of arbitrability–meaning what issues are arbitrable and what are not? The arbitrator or a court? This matters, of course, particularly in narrow arbitration clauses.
An arbitration clause might not necessarily be the proper direction for your LLC operating agreement’s dispute resolution clause. However, if you decide to incorporate one, take heed of the above points.
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