Does Arbitration Protect Your Interests?
Questions to Consider

Arbitration clauses are common elements in contracts running the full spectrum of commercial relationships. As a viable form of dispute resolution, arbitration provides a forum in which conflicts can be resolved in confidentiality and may afford a quick and inexpensive alternative to litigation. Some consider arbitration a means of avoiding the quirky jury verdicts that we read about in the newspapers by placing the ultimate decision in the hands of “experts.” In practice, arbitration can also help control the expenses associated with dispute resolution, expedite the process and place the ultimate decision with a person or people who have expertise in the subject at issue.

Although arbitration is not a "one size fits all" solution, parties to a contract often treat arbitration clauses as “boilerplate” and fail to customize the language appropriately. In fact, an arbitration provision that is not well-tailored to the needs and objectives of the parties can backfire, ultimately subjecting them to the worst elements of litigation, including high costs and significant delays. Following are a few questions you should consider when evaluating the need for an arbitration clause and whether such a clause, as proposed, will meet your objectives:

1. Will there be discovery?
   One reason people opt for arbitration is the assumption that it will help control costs. A majority of the expenses associated with litigation are incurred through the document exchange and depositions taken during the discovery phase of the case. In arbitration, the parties can agree to limit the number and length of depositions, the types of documents and information the parties will exchange, and who will bear the costs. Although it is generally ill-advised, they can even forego discovery altogether. In the end, well-planned and executed discovery can facilitate an expeditious settlement and may also save money. 
   
   
2. Other than discovery, what are the factors that impact the cost of arbitration?
   One myth associated with arbitration is that it is always less expensive than litigation. Unlike litigation, the participants must pay the arbitrator's fees for each hearing and the associated preparation time. These costs can be substantial. Additionally, the parties are generally responsible for administrative expenses, and they may have to pay for the use of the office space where the proceedings are conducted. When considering arbitration, these questions will help you anticipate and control the costs associated with the proceedings. The answers will not only impact the cost, but they may also influence the outcome.
   
   • How many arbitrators will you have? 
   • How many days, weeks or months will the arbitration hearing take? 
   • Where will the arbitration take place? 
   • Will there be live testimony or will evidence be submitted through affidavits and depositions, or some combination? 
     
     
3. Who can serve as an arbitrator for a dispute?
   One advantage of arbitration is that it allows the parties to choose the type of individual who will oversee their dispute. One option is an arbitrator with industry-specific knowledge that is appropriate to your case. Sitting judges (and the former judges who often serve as arbitrators) represent another alternative. Although they may lack certain subject-area knowledge, judges have valuable expertise in dispute resolution and the rules of evidence. Therefore, you should consider whether either party is likely to benefit from the biases that industry experts may bring as arbitrators, as well as the expertise required to resolve the types of disputes that are likely to arise.
   
   
4. What issues will the parties submit to arbitration?
   The fact that two parties have agreed to arbitration does not necessarily mean that all disputes between them will be resolved in this manner. In fact, the parties may choose to limit the types of issues that can be submitted to arbitration. Consequently, you could find yourself involved in arbitration and litigation simultaneously, depending on the terms of the arbitration agreement. While ambiguities as to what matters will be submitted to arbitration may give the parties flexibility, they also add a level of uncertainty and potential expense, and could even lead to litigation over the scope of the arbitration agreement.
   
   
5. What format will the arbitrators use for their ruling?
   Unlike litigation, arbitrators' rulings undergo only limited review. While an appellate court may examine whether the trial court improperly admitted evidence or erred in a variety of other ways, review of an arbitration award is generally limited to whether the arbitrators exceeded their authority. The opposing parties can agree to accept two types of rulings from an arbitrator: 1) a “reasoned” opinion that states the underlying rationale and may include a finding of facts in support of the ruling or
   2) an “unreasoned” award that does not offer the underlying justification. The format of the ruling affects costs, with a reasoned opinion being more expensive than an unreasoned award. In light of the very limited review available, many people opt for reasoned awards as a safeguard against arbitrary rulings.

Given the many variables associated with this form of dispute resolution, it is unwise to automatically incorporate an arbitration clause into every contract. However, if the decision is made to include one, the parties should give serious consideration to their objectives. Only by working with your lawyer to anticipate the types of disputes likely to arise from a contract and tailoring the provision accordingly will you realize the potential advantages of arbitration.

Provided as a service to our clients and friends.

The Litigation & Counseling Alert contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under professional rules, this alert may be regarded as advertising material.