Arbitration "Alternative": Don't Let Your Business Get Sucked In Too Quickly, The

Credit & Financial Management Review, Fourth Quarter 2003 by Fanning, Kevin A S

Abstract

Arbitration involves an agreement between two or more individuals or entities to submit a legal dispute for resolution with a qualified arbitrator or panel of arbitrators. The arbitrator hears evidence from the parties and renders a binding and final decision on the merits of a dispute, with very limited right of appeal. The use of arbitration by large and small businesses and individual litigants has increased exponentially in recent years. Approximately 35 states (including the District of Columbia) have adopted the Uniform Arbitration Act with few, if any changes. The other 15 states all enforce arbitration agreements and certify arbitration awards as judgments upon request of either party. Likewise, Congress adopted the Federal Arbitration Act several decades ago and federal courts have adopted an extremely strong policy in favor of arbitration of disputes.

There is no doubt that arbitration of disputes has its rightful (and sometimes mandatory) place in a multitude of arenas, including some employment disputes, government contracts, some product liability matters, domestic matters and other contexts. However, businesses should not assume that arbitration is the best alternative in every circumstance. Businesses should undertake a full analysis of the benefits and the shortcomings of arbitration prior to entering into arbitration agreements or drafting arbitration clauses. Although the view may be somewhat unpopular, a message of caution must be sent about the arbitration centrifuge that has continued to separate many companies and individuals from the court system: don't let your business get sucked in too quickly.

The Perceived Benefits of Arbitration

Arbitration can have many significant benefits for particular parties within a variety of circumstances. The most common perceived reasons cited as the benefits of arbitration of business disputes are set forth in the following broad categories:

* Perceived cost savings due to speed of resolution, less discovery and informal hearing procedures;

* Perceived ability to have more control over the entire litigation process;

* The ability to "pick the decision-maker" from a wide pool of arbitrators (judges in the traditional court system are almost always selected at random);

* The decision is final and is subject to limited judicial review or appeal;

* Perceived privacy of the proceedings and the outcome if properly preserved;

* Perceived ability to preserve a long-term business relationship with the opposition.

Large businesses involved in highly complex litigation against one or more other entities may find cost savings resulting from streamlined discovery and less formal proceedings. A better opportunity may also exist to preserve a long-term business relationship with other businesses involved in the dispute. For companies that are forced to defend "class action" style claims, the non-public and sometimes more efficient arbitration notification process may be extremely beneficial. Moreover, large volume sellers of goods or services, such as credit card companies with hundreds of thousands or even millions of customers, may wish to control collection of defaulted accounts within a nearby arbitration forum of their own choosing. This method of proceeding is usually utilized only when the terms and conditions of the credit or other agreement warrant such a method of proceeding and assumes that other jurisdictional issues will not arise. Companies in this situation hedge their bets: arguably, if many or most of the arbitration respondents default, arbitration awards are fairly easy to turn into collectible money judgments without the hassle of chasing parties in their local courts.

Given the expense associated with appellate litigation, the extremely limited right of appeal is arguably the most effective benefit of arbitration. Although, the limited right of appeal can be beneficial in many circumstances for both sides, one must always consider the possibility of a poorly reasoned, wrongly decided or patently unreasonable arbitration decision. In these instances, the finality of an arbitration award can be a bitter pill to swallow.

The Dark Side of Arbitration

Unfortunately, those who expound the efficiency and effectiveness of arbitration sometimes fail to expose the shortcomings that often occur during proceedings outside of the traditional court system. Although more robust debate in this area has recently surfaced, the lack of discussion about problems with arbitration has caused many businesses to make less than informed decisions about whether or not to include arbitration clauses within their agreements. Here are a few examples of considerations that may shed some light on the dark side of arbitration:

Cost. Most lawyers who handle arbitration proceedings realize that arbitration proceedings can easily meet, if not exceed, the cost of traditional litigation. In addition to typical litigation expenses such as lost time, attorneys fees, expert and lay witness fees and related costs, the Arbitration Association will charge significant filing fees for the arbitration hearing - some of which may or may not be devoted to the arbitrator's fees. Arbitrators will charge the litigants for every minute to review and analyze the pleadings, conduct hearings and motions, and ultimately for the drafting of the arbitration award. In complex cases, an arbitrator can haul in the equivalent of a judge's annual salary during a single arbitration proceeding. And the arbitrator has the power to award the cost of the entire proceeding or any part thereof to one party or the other. These fees and costs can be as devastating to an unwary business as traditional slug-it-out litigation in court.