Business & Corporate Articles


Should Your Client Agree to Arbitration?

Whether considering inclusion of an arbitration clause in a draft contract, or counseling clients after a dispute has arisen, attorneys must often advise their clients whether to agree to arbitration in lieu of court litigation.  The prevailing mindset especially in the business community seems to prefer arbitration over court litigation.  Arbitration clauses are frequently included in contracts.  An informed decision about whether and when to elect arbitration requires examination of often held expectations about arbitration. 

Expectation No. 1: Arbitration Is Cheaper.

Arbitration might be cheaper, but not necessarily.  Savings in arbitration may come from possibly limited discovery. 

Discovery in arbitration ranges from none, to all that is available in conventional court litigation.  The scope depends on the arbitration rules the parties select in the arbitration clause in the contract, or if not specified, then the rules adopted or imposed when a dispute arises. 

Offsetting the potential savings from reduced discovery are arbitration costs not required in court litigation.  Arbitrator's fees may be $400-$700 per hour.  It is easy for arbitrator fees to run tens of thousands of dollars or more. 

The arbitration administrator, e.g., the American Arbitration Association, usually also charges substantial administrative fees.  The AAA’s fees currently range from $1,550 to $82,500 depending on the amount in controversy.  These fees do not include the arbitrator's fees. 

Reduced discovery saves money, but it also increases the uncertainty of outcome.  The parties will arrive at the hearing not fully knowing what the opposing evidence will be, and not as fully prepared for cross-examination or with contrary evidence.  Reduced discovery may also deprive a party of evidence supporting its case. 

Expectation No. 2: Arbitration Is Quicker.

As with costs, arbitration might be quicker, but it is not necessarily so.

Speed comes from two arbitration features:  potentially reduced discovery, discussed above, and earlier finality.  Rights to appeal and review of arbitration awards are nearly nonexistent.  One recent prominent example is the Second Circuit Court of Appeals upholding the arbitration award suspending NFL quarterback Tom Brady for four games.  This affirmance was not based on reevaluation of the evidence or the merits, but on the strong policy of deference to the decisions of arbitrators.  NFL Mgmt. Council v. NFL Players Ass'n, 820 F.3d 527 (2d Cir. 2016); see also, Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2070-71 (2013) (even grave error is not enough to overturn an arbitrator’s award, good, bad or ugly).  Of course, whether early finality from lack of appellate rights is an advantage depends on whether the arbitration award is favorable. 

Motions might be heard more quickly in arbitration than court litigation because of court budget cuts. 

The arbitration hearing (trial) can be set sooner than a court trial, as early as 6 to 9 months from filing if there is little or no discovery.  By comparison, most state court cases are tried within about one year.  Time to trial in federal court may vary and be longer depending on the nature of the case. 

Ultimately, the arbitration hearing itself is likely to last at least as long as a court trial.  Evidence and arguments are presented in much the same manner, despite relaxed (or uncertain) rules of evidence and procedure.  Some judges might limit the parties’ time for presentations of their cases, but this is unlikely with arbitrators.  One of the few grounds on which the arbitration award can be overturned is the arbitrator(s)’ failure to consider relevant evidence.  Coupled with being paid by the hour, this creates an incentive for arbitrators to allow parties to present almost any evidence they want, over the objection of other parties, thereby lengthening the hearing. 

Arbitration might be faster, but not always, and at a cost of discovery and appellate rights. 

Expectation No. 3: Arbitration Is Fairer.

Fairness is a function of who decides and on what basis.  The twelve heads of a jury, instructed and supervised by a judge, are usually better than one.  A single arbitrator might overlook some of the evidence, have predilections or biases, or just get it wrong on the facts, the law or both.  Using three arbitrators instead of one mitigates against the risk, but triples the arbitrators’ fees. 

Court trial outcomes can be appealed for errors of law.  Arbitration awards generally cannot.  AAA and JAMS now offer appeals of arbitration awards to special arbitration appellate panels, but of course, there are additional costs for this. 

If parties elect appellate review or discovery rights corresponding to court litigation, one wonders, why arbitrate in the first place?  Those additional mechanisms bring the parties procedurally back to where they were if they simply adjudicated the matter in court, but at greater cost. 

Because of limited discovery, lack of a jury, and limited appeal rights, arbitration outcomes are riskier and more final than court litigation.  It is hard to see why arbitration would be fairer than court litigation. 

Conclusion

Arbitration is litigation, just not in court.  Arbitration might be the right choice for some cases.  Limited discovery rights and costs might be useful when less is at stake.  Arbitration might feel less adversarial, which could be an advantage where ongoing relationships are hoped to be preserved.  Arbitration lends some confidentiality.  Earlier finality might be worth the tradeoff of forgoing appellate rights. 

One size does not fit all.  Attorneys and their clients should carefully consider the nuances of arbitration in each instance. 

-- Duane Horning, California Business Law Group, PC

**This article is for information purposes only and does not contain or convey legal advice.  The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting an attorney. Any views expressed are those of the author only and not of the SDCBA or its Business & Corporate Law Section.**