Quick Guide to Arbitration Considerations
By Kelsey L. Smith
Mandatory arbitration clauses are now practically ubiquitous in all types of contracts. In fact, arbitrable disputes include those stemming from construction contracts, commercial contracts, banking disputes, intellectual property, medical malpractice, employment disputes, multiparty disputes, and international disputes, among others.1 Generally, arbitration is lauded as being faster, cheaper, and more flexible than traditional litigation.2 Recently, enforcement of arbitration clauses has largely given parties the freedom to utilize such clauses as they please. Despite this and its potential benefits, arbitration is not “one-size fits all”. It is not necessarily the best means for resolving every dispute a client may face. Before drafting, recommending, agreeing, or seeking to enforce an arbitration clause, it is imperative to consider the various facets of arbitration.
Arbitration provides a system of adjudication that does not follow the standard rules of procedure, discovery, or evidence.3 Compared with standard litigation, it is very lax, as it offers streamlined procedures and grants arbitrators broad autonomy in rendering their decisions.4 Often, arbitration cases are limited in scope by rules restricting full discovery. This is a double-edged sword; while offering cost-saving benefits, it also threatens to undermine the development of either the strength of your client’s case or the weaknesses in your opponent’s claims. Limited discovery may inhibit you from accessing evidence essential to your case. On the same note, the standard rules of evidence do not apply, which allows arbitrators to allow and consider evidence from witnesses that have not been cross-examined and even for arbitrators to consider hearsay.5 Essentially, arbitration offers flexibility and allows parties to tailor the proceedings, but it is imperative to carefully consider what rules best fit your client’s needs.6
Additionally, arbitral proceedings are more flexible and less formal than traditional litigation. Litigating through the court system leaves you at the mercy of the court’s schedule, whereas in arbitration, parties are granted power to determine the date, time, and place of the hearing, as well as when to take breaks from the proceeding.
Drafting Tip: To alleviate concerns over procedure, draft the arbitration clause to provide the amount of discovery desired, evidentiary procedures, and location of the proceeding.
Arbitration is typically faster than standard litigation.7 In the course of litigating a dispute, parties may experience many delays due to discovery extensions, scheduling issues, motions, etc. Consequently, a dispute can languish for months or years on end when being litigated. On the other hand, arbitration can be significantly swifter, which can allow your client to avoid “exacerbation of differences that often results from a trial that can destroy long-standing business relationships.”8 In fact, according to FINRA Dispute Resolution Statistics, the overall turnaround time for arbitration decisions over the past few years has averaged less than 15 months.9 Moreover, where parties engage in expedited arbitration, most rules of arbitral institutions will require a decision to be issued within six months of the initial filing of the dispute.10 Even under standard arbitration rules, a decision must be issued within thirty days of the close of the hearing.11
Drafting Tip: To capitalize on the potential advantages of a swift resolution through arbitration, draft a clause that outlines requirements for timing of filing and decisions by the arbitrator.
Low costs are especially important to most clients, and arbitration can be a cost-saving alternative to standard litigation. Arbitration can cost “perhaps half as much as a civil trial.”12 Arbitration offers many cost-saving measures. First, the modified procedures and ability to reach a swift resolution, as discussed, lend themselves to lower costs. Many arbitrations will limit discovery to the mutual exchange of documents by the parties, which not only saves time but also reduces substantial costs otherwise associated with exhaustive discovery.13 Next, arbitration does not require the use of a lawyer, which can reduce costs further for a client.14 However, this benefit may be frustrated in the arbitration of complex matters such that it is often prudent for a client to have counsel present.
On the other hand, arbitration does have costs that may not jump to the forefront when considering whether to arbitrate. While arbitration may save on discovery costs and attorney’s fees, arbitral institutions, such as the American Arbitration Association (AAA) and the Judicial Arbitration and Mediation Services, Inc. (JAMS) charge a filing fee and a final fee.15 In fact, the AAA’s fees start at $1,725 for a case where the amount in controversy is less than $75,000 and JAMS fees start at a base rate of $1,500 plus a 12% Case Management Fee assessed against all fees by the arbitrator.16 Not only do the parties incur these administrative fees, they also must compensate the arbitrator(s). While arbitrator rates are not typically published, the lowest-end has been noted as $150 per hour and the high-end can be over $1,150 per hour.17 Even with the lowest rates, which typically are reserved for cases involving parties with financial need, these rates can quickly snowball and cost the parties over $1,200 each day of the proceeding.18 Costs like this will skyrocket even further in the event that the parties utilize more than one arbitrator.
Drafting Tip: To ensure arbitration costs are limited, draft a clause that provides how the parties will split the arbitration fees and expenses, consider deciding that only one arbitrator will be utilized, and consider limiting discovery rules.
Choosing the Decision-Maker
Another way arbitration can be tailored to a specific dispute is by selecting an arbitrator with pertinent expertise.19 Whether it be a potential intellectual property dispute or potential commercial business issue, many disputes involve complex issues. Arbitration allows the parties to select an arbitrator with the expertise and skills necessary to understand the intricacies of the matter.20 In fact, some arbitral institutions, like AAA and JAMS, even have panels of arbitrators who have received specialized training for complex disputes.21 Moreover, the use of an experienced arbitrator can diminish the need for expert testimony and “arguably [improve] the quality of the arbitration decisions.”22 Standard litigation, on the other hand, offers no means of designating who will hear the case. Complex disputes subject to litigation will be decided by either the judge or the jury, who may all be laypersons in the subject matter of the dispute.
Drafting Tip: In the event that an arbitrator’s experience is relevant, draft a clause that not only details the number of arbitrators and the method of their selection but also any qualifications or expertise that will be required in selection of the arbitrator(s).
Privacy and Confidentiality
Unlike traditional litigation, a hallmark of arbitration is its confidentiality and secrecy. Arbitration typically does not have public filings, and as such, it offers to replace publicly litigating a dispute with a private and confidential proceeding.23 This can be a huge benefit for a client. It is an alternative “private forum so that competitors and the public do not have access to the information and testimony that the parties may not wish to [be] made public.”24 This affords parties the ability to resolve their disputes out of the public forum and insulate themselves from public scrutiny. Moreover, it also safeguards a client in resolving a dispute that may require disclosure of confidential information, business practices, financials, trade secrets, or other sensitive material.25
Drafting Tip: In the event that privacy and confidentiality are important to a client, draft an arbitration provision which details the confidentiality of the proceedings between the parties and restricts the arbitrator(s) ability to issue a written opinion.
While arbitrators are “bound by the express provisions of the arbitration agreement… if the arbitration agreement does not clearly require the arbitrators to decide in accordance with applicable law, they may make decisions that are contrary to the applicable law (and, therefore, contrary to the expectation of the party that relied upon that applicable law when it negotiated the contract).”26 Unlike judges who are tied to strict compliance with substantive law, arbitrators have the ability to disregard the law, which is augmented by the fact that arbitrators are not required to explain their awards nor to support them with reasons or findings.27 In fact, a poll in 1961 showed that 90% of arbitrators believed they were free to ignore the rules of substantive law whenever they thought that more just decisions would be reached as a result.28 Because arbitrators are given tremendous latitude to use alternative standards such as simple common sense and fairness to decide a matter, there is greater unpredictability in how the dispute will be decided and just because a party has a favorable arbitration decision in one instance does not set a binding precedent for the same decision to be made later on. 29
Drafting Tip: To reduce the unpredictability of arbitral decisions, draft a provision that dictates governing law and outlines any sort of prohibited remedies, such as punitive damages.
An arbitral decision is difficult to appeal and can only be done in narrow circumstances.30 While arbitral institutions may allow for limited correction or modification of an award, a court will not vacate an award unless it was “procured by corruption, fraud, or undue means” or there was outrageous conduct of the arbitrator in rendering the decision.31 The bar for appeal of an arbitration award is extremely high in that a “manifest disregard of the law” must be demonstrated in order to have an award vacated.32 Thus, even if the arbitrator’s award is unfair or even seemingly illogical, appeals rights are extremely limited, and the arbitration decision may strip parties of standing to bring their claims in open court. Thus, it is important to note that judicial recourse in light of an unfavorable arbitral decision is extremely limited.
Drafting Tip: Carefully weigh whether your client would benefit from an appeal right and either draft a clause that prohibits appeals rights or one that sets forth the timing and procedure that the arbitral appeal should follow.
Overall, arbitration is a viable alternative to traditional litigation. Potentially, it offers a quicker, cheaper resolution of disputes. However, there are many considerations to undertake before drafting, recommending, entering into, or seeking to enforce an arbitration clause as not every dispute is best suited to be arbitrated. After careful consideration, if an arbitration clause seems appropriate, it is important to note that what is normally boilerplate language can be tailored to your client’s needs, and the clause should be carefully negotiated and crafted as a unique dispute resolution mechanism, dictating things like rules of evidence and discovery, governing law, location of the arbitral proceedings, and expertise of the arbitrator(s), among other things. 33
1. Pros and Cons of Arbitration, ALLBUSINESS, https://www.allbusiness.com/pros-and-cons-of-arbitration-4128-1.html (last visited June 6, 2019).
2. Stephen B. Goldberg, Frank E.A. Sander, Nancy H. Rogers, Sarah R. Cole, Dispute Resolution: Negotiation, Mediation, Arbitration, and Other Proceedings, 6ed (2012) (hereinafter, “Dispute Resolution”).
3. Katherine Cassidy, A Beginners Guide to Arbitration- Part 2 Pros and Cons of Arbitration, LINDLEY LAW OFFICE BLOG (July 6, 2018), http://lindleylawoffice.com/blog/2018/07/06/a-beginners-guide-to-arbitration-part-2-pros-and-cons-of-arbitration/.
5. Robert F. Flinn, The Top 10 Pros and Cons of Arbitration, CONSTRUCTION EXECUTIVE (Aug. 5, 2014), https://constructionexec.com/article/the-top-10-pros-and-cons-of-arbitration.
6. Richard H. Kreindler, Arbitration or Litigation? ADR Issues in Transnational Disputes, 52 DISP. RESOL. J. (AAA) 79 (Oct. 1997).
7. Bette J. Roth, Randall W. Wulff, and Charles A. Cooper, Alternative Dispute Resolution Practice Guide § 3.7, Westlaw (database updated Oct. 2018).
8. Alvin L. Arnold and Myron Kove, Real Estate Leasing Practice Manual § 41:2, Westlaw (database updated Oct. 2018).
9. FIN. INDUS. REGULATORY AUTH., Dispute Resolution Statistics, https://www.finra.org/arbitration-and-mediation/dispute-resolution-statistics (last visited June 6, 2019).
10. Javier Rubinstein, Lucila Hemmingsen, and Seth Meyer, Expedited Arbitration: When Is Faster Better?, N.Y. LAW J., Aug. 7, 2017, available at: https://www.kirkland.com/publications/article/2017/08/expedited-arbitration-when-is-faster-better.
11. See American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures: Including Procedures for Large, Complex Commercial Disputes, R. 45 (rules amended and effective Oct. 1, 2013); See also Judicial Arbitration and Mediation Services, Inc., JAMS Comprehensive Arbitration Rules & Procedures, R. 24 (effective July 1, 2014).
12. Arbitration of Business Disputes, STIMMEL LAW, https://www.stimmel-law.com/en/articles/arbitration-business-disputes (last visited June 6, 2019).
13. Darryl J. Horowitt, The Pros and Cons of Arbitration, COLEMAN & HOROWITT, LLP, Client Memorandum, http://www.ch-law.com/files/pdf/news/Arbitration.pros.cons.client.memo.pdf.
14. Flinn, supra note 5.
15. Flinn, supra note 5.
16. See American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures, Administrative Fee Schedules (amended and effective May 1, 2018); See also Judicial Arbitration and Mediation Services, Inc., Arbitration Schedule of Fees and Costs, available at: https://www.jamsadr.com/arbitration-fees (last visited June 7, 2019).
17. Deborah Rothman, Trends in Arbitration Compensation, DISP. RESOL. MAGAZINE (Spring 2017), available at: https://www.americanbar.org/content/dam/aba/publications/dispute_resolution_magazine/spring2017/3_rothman_trends_in_arbitrator.authcheckdam.pdf.
18. See id.; See also What is the Cost of Arbitration; Average Costs of Typical Mediation and Arbitration Cases…, SETTLE THE DISPUTE GROUP, https://settlethedispute.com/cost-of-arbitration (last visited June 7, 2019).
19. Larry Engel, Commercial Arbitration; Winning Over the Skeptics, 52 DISP. RESOL. J. (AAA) 32 (Oct. 1997).
21. Horowitt, supra note 13.
22. Roth, supra note 7, at §20:4.
23. Dispute Resolution, supra note 2, at 304.
24. Arbitration of Business Disputes, supra note 12.
25. Roth, supra note 7, at § 20:5.
26. Engel, supra note 19.
27. Stephen A. Hochman, WE NEED A LAWYERS ARBITRATION FORUM FOR COMMERCIAL ARBITRATION (Sept. 1997), available at: https://advance.lexis.com/api/permalink/71859c1e-5b05-4ec4-b0b1-12842c7d83a1/?context=1000516.
29. Arbitration of Business Disputes, supra note 12.
30. Roth, supra note 7, at § 3:19.
31. See Federal Arbitration Act, 9 U.S.C. §10.
32. Jack Coe, The Curious Case of Manifest Disregard [of the Law], Kluwer Arbitration Blog (May 17, 2010), available at: http://arbitrationblog.kluwerarbitration.com/2010/05/17/the-curious-case-of-manifest-disregard-of-the-law/.
33. See generally Jason C. Blackford, Arbitration Provisions for Business Contracts, 48 DISP. RESOL. J. (AAA) 47 (Sept. 1993).