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Is arbitration really cheaper and faster than traditional litigation? It can be, provided that there is a well-drafted arbitration clause in the contract.
By Will Fischbach, Tiffany & Bosco, P.A.
“Parley? Damn to the depths whatever man what thought of ‘Parley!’” -Pirates of the Caribbean: The Curse of the Black Pearl
This salty commentary from an undead buccaneer reflects the sentiments many commercial litigation attorneys have towards arbitration. Many experienced litigators are wary of arbitration, and not without good reason. Arbitration can be more costly and painful than traditional litigation.
Arbitration was originally conceived in the early 20th century as an alternative to traditional litigation. During the industrial revolution, large companies had seen many valuable business relationships ruined through years of expensive adversarial litigation. They promoted arbitration as a more expedient and less expensive form of dispute resolution. This led to a number of pro-arbitration legislative initiatives. The most notable was the Federal Arbitration Act passed in 1925, but its scope was generally limited to disputes under federal law. The 1984 U.S. Supreme Court case Southland Corporation v. Keating expanded the scope of the Federal Arbitration Act dramatically to include contracts entered into under state law. By the 1990s, some legal commentators proclaimed that arbitration could supplant traditional “courthouse” litigation because it was cheaper, faster, and more efficient.
How did that work out? Probably not as well as many arbitration enthusiasts said it would. While arbitration is a widely used form of alternative dispute resolution, most commercial litigation attorneys will tell you that arbitration can be just as costly and time-consuming as “old fashioned” litigation. Indeed, some litigators contend that arbitration is far worse than traditional litigation for a number of reasons. For example, arbitration is often more informal and less structured than traditional litigation. A litigious adversary may use that lack of structure to engage in various forms of mischief that drive up legal costs. Similarly, an obstructionist or dilatory adversary may use that lack of structure to delay the process unnecessarily. Finally, while arbitrators have the power to issue a final award—i.e., proclaim a winner and award them some money—they often lack the ability to issue emergency orders or injunctions. Suppose your adversary is disposing of assets in anticipation of an unfavorable arbitration result. Unlike a judge, an arbitrator usually cannot issue an expedited order to stop it.
Virtually any experienced litigator can share some war story of an arbitration gone bad that was more painful for their client than traditional litigation would have been. Most of these bad experiences with arbitration can be traced to a single problem: a poorly drafted arbitration clause in the underlying contractual agreement.
Think about the last negotiated contract you entered into that had an arbitration clause. Surely there was some back-and-forth about the core terms of the bargain. But did anyone negotiate the specific terms of the arbitration clause? Probably not.
In fact, the arbitration clause was probably pretty vanilla. It said, “Any dispute arising out of the performance of this contract shall be submitted to arbitration,” or words to that effect, with not much substance beyond that. This can be a recipe for a disastrous arbitration.
For arbitration to truly live up to its “cheaper, faster” hype, the arbitration clause must have very specific terms governing the arbitration process. What follows are suggested arbitration clause terms that should help you avoid a costly and protracted arbitration process should a dispute arise:
Establish procedural rules. The American Arbitration Association (“AAA”) has promulgated arbitration rules for various types of disputes. AAA’s Commercial Arbitration Rules are most commonly used to facilitate business disputes, and can be utilized even if AAA does not actually facilitate the arbitration. An arbitration clause should incorporate by reference a set of rules, be they from AAA or some other source, to ensure the arbitration has a procedural structure.
Establish how the arbitrator is selected. Virtually all pre-arbitration squabbling centers on who the arbitrator will be. An arbitration clause should establish a procedure for appointing an arbitrator if the parties cannot mutually agree on one. One benefit of incorporating AAA rules is that they contain provisions for appointing an arbitrator if an agreement is not quickly reached.
Establish times limits. An arbitration agreement may fix how much time can pass between the appointment of the arbitrator to the arbitrator’s issuance of the award. 60 and 90-day limits are common. Keep in mind, however, that there will be a flurry of lawyer activity in that truncated time frame. This means two or three months of larger-than-usual bills from your attorney.
Limit discovery and motion practice. Lawsuits are often wars of attrition. The parties, or more accurately their attorneys, expend a great deal of time and money engaging in extensive, sometimes oppressive, discovery and motion practice. Consider putting reasonable limitations on depositions, discovery, and motions each side can file.
Establish arbitrator qualifications. Is the nature of the contract such that an arbitrator must have certain qualifications to effectively do her job? For example, if the underlying contract is a lease to extract natural gas from the ground, perhaps the arbitrator should have expertise in the field of oil and gas law.
Specify choice of law and venue. Most contracts have provisions specifying the venue for any court proceeding and which state’s law shall apply to any lawsuit. Such provisions do not necessarily bleed over into the arbitration clause. The arbitration clause should specify separately where the arbitration is to be held and which state’s law shall apply to the proceeding.
Exclude certain disputes from arbitration. Arbitration is not a one-size-fits all solution. Certain forms of expedited relief—such as an eviction order, prejudgment garnishment, or temporary restraining order—should probably be excluded from the scope of the arbitration clause and left to a court’s jurisdiction.
Confidentiality. One underused aspect of arbitration clauses is confidentiality. If the parties are agreeing prospectively to arbitrate any future dispute, they can also agree to keep any such dispute confidential. This precludes either side from obtaining an untoward advantage by “going public” with the dispute
Establish appellate rights, if any. Congratulations. You have your arbitration award. The other side probably isn’t too happy. But can they appeal? It depends on what the arbitration clause says. If the parties want an arbitration award to be final and not subject to appeal, the arbitration clause should say so.
Finally, one helpful tool for attorneys and non-attorneys is AAA’s ClauseBuilder tool. This is a free online tool that can assist in drafting the specifics of an arbitration clause.
Hopefully, no dispute will arise that requires anyone to commence legal action. But should a dispute arise, a thoughtfully crafted arbitration clause will go a long way to minimizing the cost, aggravation, time, and risk associated with such a dispute.
Will Fischbach is a shareholder with Tiffany & Bosco, P.A. He is an experienced litigation attorney who focuses his practice on commercial and real estate disputes. Will is rated AV® Preeminent™ by the Martindale-Hubbell Law Directory and a Sustaining Member of Arizona’s Finest Lawyers.