Commercial Arbitration: Remembering the Benefits

Today we take a look at the big picture in commercial arbitration. 

Generally, articles here are based on situations I have encountered in an arbitration, recent cases, or CLEs I’m doing.  But this article is a summary of another article, with a little editorializing from me.

The article is Debunking Misperceptions: The Upsides of Commercial Arbitration, written by Richard H. Silberberg and Neal M. Eiseman.  If you are a member of the ABA Litigation Section, you can find it in Litigation Magazine, Vol. 47, No. 3, Summer 2021.  If you can find it online, you’ll probably want to stop reading here and just read this excellent article. 

But if not, here is a short summary: 

A bad rap

The authors begin by reminding us that arbitration “sometimes gets a bad rap.”  There is plenty of controversy about arbitration contracts that bar consumers and employees from bringing class actions, the secrecy of arbitration proceedings, and whether or not the “privatization of our justice system” is a good idea.  Those issues are worthy of debate.  But the article focuses on where arbitration got started:  resolution of business-to- business disputes.    

Commercial arbitration remains popular

Arbitration of business-to-business disputes remains quite popular.  The AAA reports that, in both 2019 and 2020, nearly ten thousand arbitrations were filed with $18 billion in dispute. 

Still, the authors note, there are detractors. Some detractors claim arbitration is just as expensive as – or even more expensive than – litigating in court and criticize the lack of automatic appellate review.  But the authors emphasize the following in favor or arbitration:

Arbitration benefits

1.        The parties participate in the selection of the decision maker.  In court, judge shopping is discouraged.  In arbitration, finding a decision maker with the best experience and background to understand and decide the dispute is expected and encouraged.  

2.       Arbitrators are available with knowledge, experience, and expertise to understand the dispute.  Judges and juries are free. The parties need to pay arbitrators.  But it’s generally worth it.  A well-trained and knowledgeable arbitrator will limit the time and expense needed to resolve the dispute while providing background and experience necessary to understand the dispute.  

3.       Many disputes are best decided by an arbitrator rather than a judge and jury.  The judge may or may not have experience in the area of business involved in your dispute.  Few, if any, jurors will.  By contrast, the AAA, JAMS and other institutional providers have panels of attorneys and former judges with backgrounds in specific areas.  I should also add that you can check sources like the College if Commercial Arbitrators and Silicon Valley Arbitration and Mediation Center to find listings for arbitrators with specific experience and expertise in many specific areas. 

4.       Arbitration doesn’t automatically allow the loser to challenge the result on appeal.  Appeals are expensive and can be brought on very technical grounds, adding to the time and expense of getting a dispute finally resolved.  And while review of arbitration awards is limited, awards can be overturned if they are tainted by bias or corruption, or if the arbitrator exceeded his or her authority.  Parties who remain concerned about lack of appeal on legal determinations can agree to use an arbitral institution’s appellate rules, which provide for a standard of review similar to that in an appellate court.  The authors of the article note that arbitral institutions report that their appellate processes are rarely used. This suggests most parties don’t see the benefit of appeals in business-to-business disputes.  

5.       Less stringent evidentiary and procedural rules are possible with a skilled arbitrator.  Expensive and time-consuming disputes about admission of documents are typically avoided in arbitration.  Most evidentiary rules are, after all, designed to keep unreliable evidence from jurors.  Arbitrators are fully able to “separate the wheat from the chaff” and base their decision on authentic and probative evidence.   

6.       Arbitration can be flexible and innovative, saving time and money.  Courts are crowded, and judges are busy.  Experienced and well-trained arbitrators are selected for a specific case.  They have been trained to move cases along and know the parties expect them to act quickly.  There are plenty of published guidelines for moving ahead in a fair, fast, and economical way to resolve disputes.  For an example, see the College of Commercial Arbitrators’ Protocols for Expeditious, Cost-Effective Commercial Arbitration.  Apparently, all this effort by arbitration providers and arbitrators to promote fast and efficient arbitrations has paid off.  A study done by an economic research firm for AAA shows that federal district court cases typically took twelve months longer to get to trial than arbitrated disputes took to get to hearing. 

7.       Arbitration puts reasonable limits on discovery and motions.  A leave-no-stone-unturned discovery strategy can create an expensive and lengthy war of attrition in litigation.  Arbitrators allow discovery, but they gauge the amount of discovery allowed by what is needed in light of the size of the claim, complexity of the dispute, and needs of the case.  Discovery disputes are typically resolved informally on an expedited basis rather than by motion practice.  Similarly, prehearing motions are typically allowed in arbitration only if a party can first convince the arbitrator the motion is likely to succeed, narrow the issues, and reduce the expense of the proceedings.  

8.       Arbitration can be private and confidential.  The parties can agree to keep a private business dispute private.  Courts will keep litigated matters private only if stringent standards for sealing court records are met.  

9.       The parties can decide whether they want a reasoned decision or not.  Many parties just want to know if they won or lost.  If so, they can opt for a standard award that gives ‘the result but no explanation.  Some parties want an explanation of the reasons for the arbitrator’s decision.  If so, the parties can agree to that.  By contrast, juries don’t explain their verdicts, and trial courts write decisions as they choose.  

10.   The parties have input into when the dispute will be heard and decided.  Courts are busy and work on their own schedule.  By contrast, parties in arbitration can limit the time by which a hearing must commence and even how long it can last.  The parties have input at the outset of the process when the hearing will be held, so they and their witnesses don’t need to remain on call until the court has time for a trial.  Arbitration rules typically require arbitrators to issue awards promptly after the hearing.   

11.   Contrary to popular belief, arbitrators don’t just “split the baby.”  People often criticize arbitrators for apparently feeling sympathy for the loser or lacking “the fortitude to rule fully in favor of one party.”  But the authors note that a 2018 AAA-ICDR study found arbitrators rule in favor of one party or the other 94.5 percent of the time.  And besides, trial lawyers know that juries sometimes compromise in reaching their verdicts, too.  

Still, not all cases are suited to arbitration; some should be litigated.  But it is worth noting that, as the authors point out, “[s]ophisticated businesses in industry sectors as varied as construction, energy, entertainment, financial services, life sciences, real estate, and technology, among others, have selected arbitration as their dispute resolution method of choice.”

If you found this brief summary of interest, I encourage you to read the full article by Messrs. Silberberg and Eiseman.  It is a great resource to help decide whether or not to provide for arbitration in your next business-to-business contract.