Many business owners adopt the slogan: “Arbitration is cheaper than litigation” and look to sign contracts with an arbitration dispute resolution clause to avoid the cost of litigation. But like all slogans, this one sometimes hits the mark and sometimes doesn’t.
Because arbitration is supposed to streamline the more expensive features of litigation, such as extensive discovery (documents and live depositions), endless motions, unexpected continuances, and long delays in getting to the decision, parties expect it will be a less expensive alternative to litigation.
But the entry fee for arbitration is almost always much more than the fee to start a court action as the arbitration entry fee is typically based on the amount in dispute. So, the more money at issue, the higher the fees. Also, unlike litigation, where the government pays the judge’s salary, the parties to arbitration will pay the arbitrator’s hourly rates out of their own pockets.
One expense worth incurring is the expense of hiring experienced counsel to draft an arbitration clause tailored to saving costs. For example, requiring mandatory up-front exchange of documents, limited discovery, limited use of motions, employing only one arbitrator instead of a three-person panel, and similar measures.
Is Arbitration Really Faster than Litigation?
If containing cost is the “heads” of the arbitration coin, speed in reaching the decision is the “tails.” While no legal proceeding can be called “fast,” there is a belief that arbitration will yield a decision faster than litigation. But this is not necessarily so–the longer the process lasts, the more money the parties will spend.
Drawing on their litigation experience, some lawyers and arbitrators undermine the hoped-for speed of arbitration by importing the very litigation tactics sought to be avoided by using arbitration. Some lawyers insist on making, and some arbitrators allow delay tactics such as unnecessary discovery motions, unexpected requests for continuances, elaborate opening statements, objections to testimony, and similar time-consuming maneuvers.
Once again, a tightly drafted arbitration clause can help the parties avoid a lengthy and expensive dispute resolution procedure. Features of such a clause would include, besides the ones already mentioned, setting firm limits on opening statements, live testimony and objections, and requiring a short date for the arbitrator’s decision.
When is the Right Time to Draft an Arbitration Clause?
It is true that the parties need a written arbitration agreement to submit a dispute to arbitration. In the absence of this agreement, neither party can compel the other party to participate in arbitration. But if both parties are open to arbitration, they may sign a later written agreement to choose arbitration to resolve their dispute. The better choice is to draft a suitable arbitration clause in the original contract to ensure that arbitration will be the agreed-on dispute resolution mechanism.
Is an Arbitration Decision Really Final?
One of the attractions of arbitration is the finality of the decision—it’s “one and done.” The arbitration decision (called an award) is intended to be final, incapable of being set aside by the court, and non-appealable. Two important considerations come to light:
(1) In rare circumstances, a court may set aside an award because of arbitrator bias, fraud, or misconduct brought to light by the losing party.
(2) The rules of the agency administering the arbitration might have an optional appeal process. The American Arbitration Association Rules, for example, have an optional process that the parties may agree to adopt in their arbitration agreement. The parties can require an arbitral appeal in the original contract.
Just as confirming an arbitrator’s decision requires a court order, so does setting aside an award. Provisions that outline the mechanism for setting aside an award appear in Section 10 of the Federal Arbitration Act and in Chapter 251 of Massachusetts General Law.
Is Confidentiality Always Guaranteed?
Another appealing feature of arbitration is its confidentiality. Arbitration is a confidential process where only the arbitrator and the parties are privy to the proceedings and the arbitrator’s decision. Arbitrators have an ethical duty to keep the matter before them confidential and are protected by the doctrine of arbitral immunity, so they cannot be forced to divulge the facts of the proceedings.
However, confidentiality can easily be broken by imprudence. You can likely imagine a hundred-and-one ways confidentiality can be broken so we will not develop a list. But all parties should be aware of the confidential nature of the arbitration and discipline themselves to keep the matter private. An express reminder about confidentiality in the arbitration agreement itself can act as a “speed bump” that counsel can point to and encourage the client to practice restraint. An experienced arbitrator will know to take every precaution possible to ensure the confidentiality of the process.
Work with Experienced Legal Counsel to Customize Agreements
For many industries, arbitration is the predetermined or preferred dispute resolution mechanism. But that does not mean arbitration agreements should be cookie-cutter. On the contrary, just as each business and business owner is unique, the contracts and agreements that protect that business should be customized.
Working with legal counsel who have a deep understanding of contract and business law and an intricate knowledge of the arbitration process can help protect your business in the long run. For more information on whether an arbitration agreement might be the right approach for your business, contact Sassoon Cymrot today.