Jack, take a look at this. Peter, my former partner, sent me this demand letter saying I owe him some huge amount now that I have terminated him from the business. Never mind that I have carried him for years. At least our partnership agreement requires any disputes to be resolved by arbitration so I won't spend my next three years in court. My lawyer promised me arbitration was a quick, cheap, easy way to settle any disputes that might arise. What do you think?
Arbitration can have its advantages. It can be a faster and cheaper than a court filing. The arbitral process can be less formal and disputes can be resolved with greater finality than is often the case in judicial proceeding. One of the biggest advantages to arbitration for many is that it is largely confidential unlike judicial proceedings that, except in exceptional circumstances, are subject to the public's inspection. Arbitration is not, however, without potential downsides.
One of the first things you'll learn about arbitration is that rather than paying $250 or so for a filing fee, the cost to start the case can run into the multiple thousands of dollars. This may be a desired impediment to the other side's filing for arbitration. Of course, if you are the one with the complaint, that can be a problem. You can avoid the initial fee charged by organizations that administer arbitrations if the arbitration clause in your contract does not require the complaining party to institute arbitration through one of those entities. Of course, having a process in place for the initiation of a dispute resolution process may be well worth the cost.
There is also the expense of the arbitrator(s). Rather than have the taxpayers foot the bill for a judge, his clerks and administrative staff, in private arbitration the parties pay for all that. Most agreements provide that this cost will be split by the parties. Where, for instance, the arbitration clause calls for a panel of three; one chosen by the complainant, one by the defendant, and one by the two arbitrators chosen by the parties, the cost can run into the tens of thousands of dollars. Figure the cost for three well-regarded lawyers or former judges billing $600 and more an hour for a week long hearing with a couple of days needed for preparation, prehearing disputes about discovery, and a couple of days for the panel to write up the result and you can see that the cost of "judging" alone may run over $100,000. Not a scenario our forefathers expected when they established a free and independent judiciary.
Another phenomenon to think about is that in arbitration the "judge" or "judges" do not serve as part of an independent judiciary. Granted, even judges with lifetime appointments come to the bench with preconceptions, but in arbitration there is an even greater risk of influences on the decision maker(s) other than a pure consideration of the merits. For instance, a private practitioner chosen by two of his or her peers may have a difficult time deciding wholly for one party or the other because he or she knows they will have to work with their colleagues again in the future. This may be why arbitrators have a reputation for "splitting the baby." Likewise, if an arbitrator derives much of his or her income arbitrations, he or she may at least unconsciously be more inclined to resolve matters in favor of the source of potential repeat business.
Having a streamlined process can also seem to some as though they are being "steam rolled." While the discovery process in litigation can be cumbersome, expensive and time consuming, it is designed to enable both sides to learn the facts they need to know to have their case heard on the merits. Expedition in the arbitral process may get to the result faster, but there may be important facts that are left out. Similarly, where there is the potential for a motion practice in a judicial setting that could result in the other side's case being thrown out based on the undisputed facts, this is an unlikely result in an arbitration where the arbitrators are being paid to decide the case at a hearing.
The finality of arbitration can also be a weakness if you happen to be on the wrong side of an arbitral decision. When you lose a court case you think you should have won you generally have recourse to the appeals courts. Even in a judicial forum to overcome a trial court's decision on appeal, but where there is legal error, or the fact-finder has grossly misunderstand the facts, the appeals courts will reverse the offending result. By contrast, many arbitration statutes and the laws governing arbitration provide that the result of arbitration is final unless you essentially can show that the arbitral process was corrupt. In other words, if the arbitration decision goes against you, you are likely stuck with it.
So, while arbitration has a definite potential upside, there are some possible negatives to take into account before drafting and agreeing to such a clause.
Published in New Hampshire Business Review
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
