Strategic Considerations for Including Arbitration Clauses in Your Contracts
A large amount of contemporary litigation involves demands to arbitrate. One party – usually a business or a foreign litigant – wants to arbitrate; the other, often an individual or a local litigant, does not. Businesses and foreign litigants often complain that they cannot obtain fair trials before American juries; that the typical judge or jury can sometimes find difficulty in understanding highly technical or complex disputes; that litigation takes too long; and that even after prevailing in a case, the entire process was too expensive. Arbitration is touted as the cure to these evils.
There are four (4) common advantages to arbitration. First, an agreement to arbitrate is purely contractual. The parties have great latitude in setting the rules for how their dispute will be decided. This includes choosing the arbitrators – the people who actually decide the dispute. This leads to the second advantage: for truly specialized or complex disputes, the parties can choose arbitrators who have relevant expertise. Third, arbitration contracts typically designate the location where arbitration must proceed. If a transaction involves parties from different states or different countries, the arbitration clause will allow the party who drafted it to proceed where they know the law and where they have existing relationships with counsel. Finally, if relevant evidence is accessible and relevant witnesses are cooperative, arbitration may indeed be fast and effective.
From there, however, the expected advantages of arbitration can prove illusory. Some are disappearing because arbitration is becoming more and more popular; some never existed.
For example, arbitration is not always faster than litigation. U.S. federal courts expect most cases to be completed within six (6) or nine (9) months. Federal judges have both the desire and the authority to clear them from their dockets. All judges are, more or less, always available, whereas arbitrators are private individuals who may have other, more important careers. Due to the popularity of arbitration they often have limited time to commit to a given case. Often they have little real authority to compel the parties to appear when they themselves are available. As private citizens, they also may be reluctant to exercise what authority they do possess when doing so may offend or injure one side or the other. Thus a postponement or cancellation may cause a delay of several months, not days or weeks as in court proceedings.
Likewise, arbitration is not necessarily less expensive. Most private arbitration societies require fees in advance – just to get started – which are based upon the amount in dispute. Thus, while a dispute over $150,000 would cost about $300 to file in a court, it would cost $4,000 just to initiate arbitration of that same dispute with the American Arbitration Association (the AAA filing fees are “capped” at $71,000). From there, the arbitrators themselves get paid for their time, at least $250 per hour. In disputes where there is more than one arbitrator (often three (3) are required), arbitrator costs may exceed $1,000 per hour on the case. Judges, by contrast, are paid by the taxpayers: litigants incur no extra expense (beyond their taxes) for judicial labor.
Judicial litigation offers at least one distinct advantage over arbitration: discovery. In litigation, parties have the right to obtain documents from each other; to require sworn, written answers to written questions; to subpoena non-parties for information; and to take the deposition of any relevant witness. The rules of many, if not most, arbitration associations do not contain any provisions for discovery. Parties can include discovery provisions in their arbitration contracts, or designate a set of rules which does allow discovery, but there again the arbitrator may have limited authority to compel cooperation. The arbitrator will have no authority to require the cooperation of non-parties, such as bystander witnesses. In certain jurisdictions, if the chosen arbitration rules provide, the parties may be able to apply for a court order to compel discovery – but by definition this reduces the “advantages” of arbitrating in the first place. Moreover, in some civil law jurisdictions (such as France) it may be illegal for private attorneys to engage in discovery. Thus, if you do not already have evidence which is important to proving your case, arbitration may leave you at a distinct disadvantage compared to litigation.
Efforts to compel arbitration may prove self defeating in themselves. If you find that the foregoing concerns provide you an advantage, then they will most likely cause a disadvantage to your opponent. Your opponent will therefore sue in a court of law, requiring you to seek an order compelling arbitration. The mere fact that a contract has an arbitration clause does not mean that it will be enforced under all circumstances. The clause may not comply with the statutes which authorize arbitration in the first place, or common law contract defenses may be available (fraud in the inducement, lack of capacity to contract, etc.). Whichever side loses on that question often takes appeal. Thus, even if a contract has an enforceable arbitration clause, the parties might go through an entire court proceeding anyway.
Finally, many of the “evils” commonly cited about litigation can be avoided through effective contracts. More and more contracts include waivers of jury rights, eliminating the uncertainty and tremendous expense associated with jury trials. If a particular judge does not have enough time (or patience) to give special attention to a complex case, most court systems allow for the engagement of general masters. Contracts can also include both choice of law and choice of forum clauses which require parties to sue in a specified location, thereby eliminating geographic uncertainty and disadvantage.
Conclusion
Despite the conventional wisdom, businesses must carefully decide whether or not to include an arbitration clause in their contracts. They must pay attention to the nature of any likely disputes arising out of the contract; the form of the arbitration agreement; the location of the arbitration; the rules of procedure; and a host of other considerations. Whether you are contemplating such a decision, need help in drafting an arbitration clause, or are faced with a dispute going to arbitration, Arista & Herrán can help you achieve your best result.
By: Christopher J. Bailey, Esq.
Ph: 305-444-7662
Email: Christopher@AristaLaw.com |