Arbitration

WHAT IS ARBITRATION AND WHY MIGHT PEOPLE USE IT?

Arbitration is one of several methods of “alternative dispute resolution” (ADR) used in lieu of court proceedings. The American Arbitration Association (AAA) has defined arbitration as follows, “Arbitration is the out-of-court submission of a dispute to an impartial third party or parties for a binding decision.” 

There is a lot packed into this very short definition of arbitration – a very important ADR process. Let’s unpack it for a closer, but summary, look, while first briefly considering other common dispute resolution processes such as ignoring the dispute, negotiating the dispute, mediating the dispute, and suing over the dispute. Then, we will explore arbitrating the dispute.

1. Typical Business (“Commercial”) Dispute Resolution Paths. People and companies often disagree with one another. Typically, those disagreements are minor, short lived, and easily resolved by, and between, the parties to the dispute, through ordinary, respectful, communication, without the need for court, or any other third-party intervention.

We’ll use the following hypothetical example throughout this discussion: A purchase order may be placed with a manufacturer by a merchant for goods for resale at the merchant’s retail store. If those goods arrive much later than promised, are less than the amount ordered, or are defective, the merchant may decline to accept the goods, may decline to pay the invoice, and may demand the manufacturer from whom the goods were ordered, to pay damages for lost profits related to the anticipated retail sale of the goods by the merchant.

If the manufacturer acknowledges the validity of the merchant’s claims and agrees to accept the return of the goods, without cost to the merchant, and also agrees to pay the claimed lost profits, there may be disappointment on the part of the merchant about the failed transaction, but there will be no real dispute, and everyone may go on with life – perhaps continuing to do business with each other, perhaps not. Either way, the issue will have been quickly corrected, solely and voluntarily by the parties, and issues that could have developed into a lengthy, expensive, court battle, will have become non-issues.

But, if the manufacturer denies the merchant’s claims, or demands full payment for the goods, or both, then a dispute will exist. Immediately, there will arise the inherent issue of how to resolve the dispute.

A common approach for resolution of such a dispute might take the following sequential path, potentially leading to third-party interventions.

(a) Ignoring the Dispute: Both of these businesses may choose to ignore their dispute, perhaps deciding the dispute is not worth the time and cost of any efforts to seek resolution, and may further choose to avoid doing business with each other again. While this might not be considered an actual resolution of the dispute by some people, the outcome would be similar in that there would be no on-going resolution efforts. Further, this would be solely the parties’ voluntary determination of how to handle the dispute (it should be noted that minds do change over time; so, even ignoring the dispute might best be handled by each party signing an agreement not pursue any claims against the other arising out of the original transaction).

Likely this dispute would not become a public matter. It would have been resolved “out-of-court,” without the aid of a third party dispute resolution neutral, and without any binding effect, unless the parties had not just walked away from one another, but actually had mutually agreed not to pursue or defend their respective claims underlying the dispute (again, if an affirmative agreement were reached, it would be wise to put it writing).

If the parties chose not to ignore their dispute, then, at least briefly, they would likely move on to a formal negotiation process.

(b) Negotiating the Dispute (that is, the parties trying to “work it out” between themselves): Perhaps, if the parties waited a reasonable period of time after the dispute arose – a “cooling off period,” then sat down together, in good faith, with the intention to reach resolution of their dispute by exploring different options, and with relevant facts and figures readily at hand, they would succeed in putting the conflict behind them.

For example, after considering their history of doing business with each other, the merchant might agree to take, and pay for, the goods that were not defective, in return for which, the manufacturer might agree to pay the return freight on the defective goods and also to pay the full freight on the next two orders of goods from the merchant, with the merchant further agreeing to abandon the lost profits claim.

If so, the dispute will have been resolved in a manner mutually agreeable to, and solely under the control of, the two businesses. Again, this would have been a voluntary method of resolving the dispute “out-of-court,” unlikely to become public knowledge, and accomplished without third-party assistance (if the parties each employed professional negotiators – for example, their attorneys, this method of resolution would still be considered to have excluded third parties, because the negotiators would have been under the direction of the disputing businesses and not independent neutrals).

If negotiation by the parties were unsuccessful, they might voluntarily bring into the dispute a trusted, but impartial (that is, “neutral”), person to mediate between them, in order to help them resolve their conflict on their own terms.

(c) Mediating the Dispute (that is, having a third person, with no personal interest in the outcome, help the disputing parties reach a mutually agreeable resolution of their dispute): For a variety of reasons, many people, especially when under stress resulting from conflict, cannot effectively interact – such as, negotiate – with one another, and likely cannot reach resolution of their disputes, without a disinterested person assisting with the negotiation process. This is why mediation is often referred to as “assisted negotiation.”

So, when negotiation by the disputing parties fails (or the parties do not care to try to negotiate on their own in the first place), the parties may voluntarily “submit” their dispute to an “out-of-court,” mediator who may be able to lead them to find their own solution to the dispute; that is, the mediator may help them “settle” the disputed matter on their own terms (a mediator has no authority to force a settlement, or even any individual settlement terms, on any party to a dispute).

In our example, mediation might lead to the very same hypothetically agreed result discussed above (see, “Negotiating the Dispute” ), but which, on their own, the parties might have failed to achieve. For most disputes, this is the last available fully-voluntary manner of dispute resolution, and the last significant opportunity to keep the dispute out-of-court and out of public awareness. It is also, generally, the first method of dispute resolution by which the parties submit their dispute to a disinterested, impartial third party, without any requirement to reach a settlement, or to even keep trying to reach a settlement. They are free to cancel or leave the mediation at any time they choose.

(d) Suing Over the Dispute (the traditional, in-court dispute resolution process): Generally, if the above-discussed alternative methods of dispute resolution have failed, or were not tried at all, and if the matter is important enough to one or both of the parties, the next likely approach would be for one of the parties to seek a forced resolution.

Often, that means the aggrieved party (usually referred to as “plaintiff,” “petitioner,” “complainant,” or “claimant”) will file a court lawsuit in which that party’s view of the main facts is set out in a written complaint seeking whatever resolution the filing party thinks appropriate. Then, the other party (usually referred to as “defendant” or “respondent”) may not just dispute the initially filed lawsuit, but may file their own counter-lawsuit (often called “counter-suit” or “cross-complaint”) seeking a different resolution.

At this point, most of the control over the dispute resolution process, and the decision of who will prevail, has been transferred to an independent, randomly-picked, court judge, and possibly a jury. The parties do, however, retain their rights to undertake independent efforts to settle their dispute, even as the lawsuit progresses; but, otherwise, the power of the court will direct the proceedings.

It is important to know that by the mere filing of the lawsuit, the dispute, and many of its significant details, automatically will become public information.

It is also important to know that for business lawsuits, the use of attorneys, which was optional in the previously discussed methods of dispute resolution, is generally mandated and very expensive in comparison to self-resolved, or mediated resolutions.

The reason for the frequently mandated use of lawyers in the court process is that most businesses are usually legally-created, artificial “people” (for example, a corporation or limited liability company (LLC)). In many, if not most, court jurisdictions, only licensed attorneys may lawfully represent another person in a court proceeding. So, generally, even when the sole principal of a corporation is also the sole shareholder of that corporation, and will likely control the decision-making for the corporation, including the decision to dispute or not dispute the issue of conflict, the company will need to hire (retain) its own attorney. This does not apply to a sole proprietorship company, because the company and the owner are one in the eyes of the law.

Usually, experienced attorneys are expensive and bill for their services by the hour. Recently, there have been alternative fee structures tried for business cases such as: “flat fee” from the start of the case through the trial, with another flat fee for any appeal proceedings – defending a win or attacking a loss; and, contingency fees for plaintiff or defendant, due only on a satisfactory result. However, the hourly rate remains the normal fee arrangement. Accordingly, time really is money in court-related dispute resolution.

Modernly, almost all courts are understaffed (judges, clerks, general support personnel) for the number of lawsuits filed, so cases often languish in line for trial for a considerable time; not uncommonly, one to five years from the date of filing the original complaint, depending on the particular location and court. During that waiting time, the parties usually undertake discovery (gathering evidence for trial) through such procedures as witness depositions, demands for documents, objections to discovery requests, and related legal arguments to enforce or avoid the discovery requests. These processes are time consuming, and therefore increasingly expensive.

Further, matters must be scheduled according to the court’s own calendar, taking into consideration the calendars of the attorneys, parties, and key witnesses which can lead to further delays and related expenses. For example, additional expenses can be incurred when attorneys spend time preparing themselves and their witnesses for a scheduled trial that is suddenly postponed for six months to a year, and the attorneys must once again prepare themselves and their witnesses as the new trial date approaches.

Once the trial finally starts, evidence is generally presented in a very formal, time-consuming manner, due to fairly strict court-related evidentiary rules. If the case is submitted to a jury, rather than solely to a judge, the presentation of evidence is usually even more time consuming.

When the trial is over, and the verdict in, the loser generally has a right of at least one post-trial appeal. Court and jury trials are never perfect, so there is always the possibility of the judgment being reversed, or sent back (remanded) to the trial court for additional, or repeat, proceedings. If that occurs, the parties may have to undertake a partial or whole new trial, with associated additional expenses.

So, as can be seen, despite the efforts of the judge and the parties, a court lawsuit can be a lengthy, very expensive, and unpredictable dispute resolution process, controlled by a decider that the parties had no part in selecting. That said, there are times when a court trial will provide a better resolution for a particular dispute than other resolutions. However, for many, perhaps most, civil disputes in which a settlement agreement cannot be reached and a forced resolution is sought, especially in business-to-business or business-to-consumer cases, there is a voluntary alternative to a court lawsuit.

Arbitration is that alternative process. It is often confidential, faster and less expensive than court litigation. It provides the parties with input as to the selection of their decider, binding, seldom appealable decisions, that are even more seldom reversed or remanded on appeal.

2. Arbitrating the Dispute (i.e., undertaking a voluntary, private, out-of-court, informal, trial-like, dispute resolution process, presided over by an impartial third party, selected by the disputing parties, and whose decision is binding and enforceable in a court of law):

Today, arbitration is seen by many as a relatively new dispute resolution process to be used as an alternative to court lawsuits. But, actually, it is a process of deciding disputes that has ancient roots. In North America, merchant and maritime arbitration have been documented as having been in common use since at least the 1600’s in New Amsterdam (now New York). Arbitration has been in continuous use in North America since then (Wm. C Jones, Three Centuries of Commercial Arbitration in New York: A Brief Survey, 2 Wash. U. L. Q. 193 (1956); Clay Maitland, New York: Where Maritime Arbitration Began, www.claymaitland.com/wp-content/uploads/2018/02/NYMARArticle.pdf on 03/08/2019).

Generally, the reasons for using arbitration in New Amsterdam in the 1600’s, and throughout the modern world today, are the same, with a few adjustments for cultural differences and the passage of time. The following will discuss the most significant of those reasons:

(a) Voluntary Process: In general, if a person or business has a claim against another for injury or other loss, the allegedly aggrieved party has a legal right to seek assistance and compensation through a court of law. If the party claimed to have caused the loss does not choose to participate in the court process, that process, usually, will go forward anyway. Arbitration though is voluntary; if the parties have not agreed to the process, they cannot be forced to resolve their dispute through arbitration. However, this requires some clarification.

Due to court congestion, many jurisdictions have enacted “mandatory” arbitration laws in the hope that court appointed arbitrators could hear smaller, less or non-complex, cases and relieve the congestion and shorten the waiting time to be heard. But, in order not to trample the parties’ legal rights to a judicial proceeding, these mandated arbitrations come with a right to a completely new (“de novo”) judicial trial, if either party timely appeals the outcome of the arbitration.

The legislative hope has been that, once the parties have told their stories and an impartial arbitrator has heard them, the parties will accept the outcome and not assert their right to a de novo judicial proceeding. To make acceptance of the arbitral outcome by the parties more likely, some jurisdictions have rules in place requiring that if the de novo trial outcome is less favorable to the party who requested the new judicial proceeding, that party must pay for the associated costs, even if that party “won.” So, as a practical matter, the rule that arbitration is a voluntary process remains in effect, because, having not agreed to the arbitration, the parties are entitled to return to court for a judicial proceeding.

Turning then to voluntary arbitration, the question arises, “when and how do the parties voluntarily agree to arbitrate their disputes?” Actually, the parties can agree at almost any time; pre-dispute (through a clause in their substantive contract), as soon as a dispute arises, mid-way into the dispute, and even during a civil court suit, or on appeal from a court judgment (by use of a separate, written agreements).

Because arbitration is very often confidential, it is unlikely that reliable records exist as to what stage most disputing parties select the process. However, anecdotally, it appears likely that arbitration most often is selected pre-dispute; specifically, during the negotiation process of a contract. During deal making, even tough, contentious, deal making, contracting parties are generally at their most agreeable. Arbitration clauses are commonplace in contracts, especially business contracts, so objections to them are less likely during the “agreeable” season of deal making, than after a contract conflict arises.

And, not only can reasonable parties agree in their contract to use arbitration, they also can select the arbitral organization to administer that process. Or, they can agree on one or more independent arbitrators to conduct arbitration “ad hoc” (as necessary), without an administering organization. Further, they can pre-select the qualifications of the potential arbitrators, as well as the procedural rules for the arbitration.

Finally, negotiation of many, if not most, commercial agreements involve the use of attorneys. Dispute resolution may turn out to be the most important clause of the contract. So, negotiating the dispute resolution process with the assistance and advice of these knowledgeable, deal making attorneys, at the time the deal is made, rather than after a dispute has arisen, will likely result in a better, less expensive, resolution outcome.

(b) Speed of Resolution: While not always true, the vast majority of these trial-like proceedings can result in a decision and award much more quickly than a court trial – often, taking just months instead of years. The reasons for this relatively quick, process, in addition to those briefly discussed above, include at least the following:

(i) No Unavoidable Court Congestion: Courts are quite often very congested. When the caseloads of the judges in a given jurisdiction are full, additional judges cannot be hired overnight, and cases cannot be shifted from courthouse to courthouse simply because of overloaded calendars. So, litigants must wait; sometimes for many months, sometimes for years, just to get to trial, then sometimes followed by many more months for the judges written decision to be issued. Usually, arbitrations can be completed in a fraction of the time associated with court trials.

(ii) Less Discovery Allowed: Saving time and money are two of the hallmark benefits of arbitration over court trials. Chief among the reasons for saving both are the limitations normally placed on discovery by arbitral institution rules and arbitrators’ careful enforcement of those rules (of coursed discovery can be increased by agreement of the parties, or the legitimate needs of the case and a fair hearing).

(iii) No Jury: Not all court cases are brought before juries, but a fair number are. The right to a jury trial is an important constitutional right in the United States; but, jury trials are time consuming and therefore expensive (for example, most civil trial jury expenses must be posted with the court by the parties before trial). And, the longer the trial, the higher the attorney fees. Therefore, non-jury arbitrations can can, once again, be noticeably less than a court jury trial.

(iv) Less Formal Procedures: Whether court trial or arbitration, there is an evidentiary presentation process. In courts, there are often very tedious evidentiary rules, especially when juries are involved. In arbitration, the evidentiary rules are informal. For example, in court, relevant evidence is often excluded if it is hearsay (usually second hand oral or written evidence) and does not fall into one of the hearsay exceptions. In arbitration, most hearsay evidence is received into evidence, but is considered by the arbitrator(s) and given the weight it deserves based on all of the evidence received. This can vary from no weight to extreme weight. Receiving such evidence allows the parties to present their full cases, reduces allowable objections, and speeds along the hearing process.

(v) Minimized Motion Practice: A motion is, simply put, a request to the judge or arbitrator. Requests for more or less discovery, to prohibit or admit evidence, to add to the complaint (petition), to dismiss the case or to summarily decide it, and many others. They are generally accompanied by lengthy written arguments and legal authorities. Then, the other side to the proceeding will usually file lengthy written responses and counter legal authorities. This is time consuming and expensive. These motions are routinely made in court hearings, but are often limited or disallowed in arbitration, depending on the circumstances. In fact, in arbitration, parties are often required to ask the arbitrator for advanced permission to file any motion and to make a reasonable argument as to why their proposed motion(s) should be allowed to be presented. This arbitral process allows the arbitrator to keep the case on tract without unreasonable delays and expenses related to motions that are unlikely to significantly advance the case for either party.

(vi) Telephone Proceedings Commonly Available In Arbitration: Courts routinely require attorneys. and sometimes their clients, to be present in court to present motions and to undertake preliminary and pre-trial hearings. This is expensive in terms of attorney travel and waiting time, inconvenient to the parties, and often unnecessary. In arbitration, unless the parties request in-person pre-hearing processes, they are usually undertaken by telephone. In fact, if the parties and arbitrator agree, some evidentiary hearings can be held by telephone. Less time, less money.

(b) Finality of Decision and Award: Unlike court judgments, arbitration awards are appealable only on limited grounds, and are much less likely to be overturned than are court judgments).

(c) Confidentiality: With rare exceptions, court cases are public, meaning all documents filed with the court, and in-court proceedings, are available for public scrutiny. With arbitration, it is the opposite – most cases are private and the documents and proceedings are not available to the public. That said, if a party with a contractual agreement or statutory obligation to arbitrate, none-the-less files a lawsuit, the existence of the dispute, and at least one side’s allegations will be public record, unless and until the court where the lawsuit was filed orders the record sealed. Confidentiality can also fail if the losing party appeals to a court, or the winning party needs the help of the court to enforce the arbitral award.

(d) Choice of Deciders: In most civil court cases, the decider is a single, randomly-selected judge, or sometimes a jury, but neither with any guarantee of significant knowledge about the type of dispute being presented. In arbitration, the deciders are called arbitrators and the disputing parties generally have the opportunity to select the number (usually one or three) and the professional backgrounds of the arbitrators, usually resulting in a high level of confidence in the arbitral decision.

(e) Generally, International Enforcement of A Commercial Arbitral Award Is Easier Than A Court Judgment: Under the provisions of an international treaty known as the New York Convention, 1958, an arbitral award made in one signatory country can be recognized and enforced in another signatory country with less difficulty than a foreign judgement).

CONCLUSION: ADR, especially arbitration and mediation, can provide prompt, cost effective, binding resolutions of disputes of many types. It is a time-tested process that has been accepted throughout much of history as an alternative to a government court proceeding. If you or your company are involved in a dispute, you and your attorney should consider the use of ADR.

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