Arbitration was borne at a time when the court systems lacked necessary processes, procedures and rules to expeditiously move a case along to a quick resolution, and at a time when court procedural rules allowed parties to “paper” the courts causing great delay and unnecessary attorney’s fees to be incurred by the parties.
Most states, including California and Colorado, have protocols, systems, processes and most importantly rules in place which now “fast track” matters to be tried before a court or jury within one year of the commencement of the lawsuit. In addition, there are rules in place that prevent attorneys from “papering” the courts thus preventing delay and increased attorney’s fees. So the novel idea that arbitration in the commercial setting is quicker and less expensive, is more often than not, simply not the case.
Additionally, similar to the Court system, in commercial arbitrations, attorneys are involved. It has been my experience that attorney’s typically agree to the same scope of discovery (i.e. depositions) or sometimes even more discovery than is permitted under most State or Federal rules. The latter increases the fees and costs.
I have rarely seen commercial arbitration disputes be less expensive than the court system. In the court system, judges do not charge the parties for their time, the court system doesn’t charge substantial administrative and hearing fees. In the arbitration setting, the arbitrator, or if you have more than one arbitrator, the arbitrators typically charge high hourly rates for teleconferences, review of emails, motions, briefs, and to preside over the trial/arbitration, etc. If you have a three day arbitration, this can amount to $7,200 ($300 x 24 yours @ 8 hours per day). Imagine if your arbitration lasted two weeks or more. Generally, I have seen arbitrator’s charge in the range of $250 to $600 per hour for their time. Again, Judges are free, and are required to follow the law of the State or Federal jurisdiction governing the particular dispute.
Based on my experience, and the above, it is this author’s opinion that arbitration is generally more expensive and much more unpredictable as to a particular outcome. The disclaimer being, of course, that the type of matter, its complexity, and the industry involved, may warrant arbitration over the court system.
Also, I have rarely seen arbitrators have any checks & balances. Commercial arbitrators are essentially free, with some exceptions, to do what they want regardless of the law, the facts, and the circumstances pertaining to the dispute. I have seen rulings that have no basis in law, fact and lack complete common sense, including rulings permitting drastic invasions of a businesses’ proprietary information. Arbitrators can cause fees to increase without recourse – with no ability to appeal a ruling/order.
After reviewing a particular case, Sandstrum Law typically does not recommend putting an arbitration clause in a commercial/business agreement. It has been my experience that transactional lawyers are “tied” to their forms and since they contain arbitration clauses, they simply keep them in the agreement. Counsel should discuss the advantages and disadvantages of an arbitration clause with their client before the client signs the contract – as substantial attorney’s fees may be at stake for the reasons set forth above.
Sandstrum Law doesn’t follow standard concepts, preconceptions, routine and standard procedure utilized by some transactional lawyers. Instead, we pay attention to the client’s goals – this is what many transactional lawyers fail to do, they download a form, without thoughtful analysis of avoiding litigation.
Sandstrum Law clients get a double sided analysis, they get a litigation and transactional analysis – avoiding lawsuits.
Further, arbitration outfits are profit driven, another reason why the Court system is likely a better fit.
That said, arbitration is more flexible than litigation, especially with regard to the admission of evidence, including expert testimony. Thus, arbitration may be preferred where a strict application of the rules of evidence would hinder a party’s ability to prove its case.
It has been said that arbitrators may find it difficult to separate factual and technical questions from legal questions. Critics of arbitration also say there is not the same degree of predictability in the decisions of lay arbitrators, chosen ad hoc for an occasional dispute, as there is in the decisions of a tribunal bound to follow rules of law.
That said, commercial arbitration proceedings may be appropriate for disputes where the parties wish to resolve their disputes privately—disputes involving technical secrets, corporate reputations, or others that might prove embarrassing or costly to the parties if the circumstances were to become public knowledge. With that in mind, I typically would never place me client’s company intellectual property and trade secrets in the hands of an arbitrator.
Moreover, with arbitration, an award, in the absence of fraud or collusion, is generally considered final and conclusive of the controversy. Such an award has the advantage that it effectually ends an existing dispute and prevents future litigation on the points involved, conforms to and fully satisfies the question submitted, and leaves no further act to be done or inquiry to be made in regard to the matters submitted. There is no meaningful right to appeal a blatantly wrong outcome/award – which is unfortunate, as this gives the arbitrator almost unfettered power to decide a case the way he or she wants without concern of being appealed.
Also, one of the more generally recognized disadvantages of arbitration is the arbitrator’s failure to state reasons or grounds for the arbitral award. Arbitrators are no more bound to go into particulars, or to give reasons for their award, than a jury is for its verdict.
The limited scope of appellate review of an arbitration award has also been cited as a disadvantage. The merits of a controversy submitted to arbitration and on which an award is made are generally not subject to judicial review, unless the parties agree otherwise or where the illegality of the entire transaction is raised in a proceeding to enforce the award. On judicial review of an arbitrator’s award, the court’s function is severely limited, being confined, with limited exceptions.
As hinted to above, the possibility of an arbitrary, irresponsible, or capricious award is also a disadvantage. Although an award may be, and usually is, set aside for fraud, collusion, or other misconduct or related reasons, a number of awards fall into a borderline area and will be upheld, frequently to the disadvantage of one or both of the parties.
Last thoughts – consult Sandstrum Law, I won’t put an arbitration provision in a contract because it what some transactional lawyers do just because it is in an existing or reused form, I will advise if it is warranted or not, and explain why. Sandstrum Law speaks two languages, business transactions and business litigation, making your agreements stronger and saving you money because this experience reduces the chance of landing your business in a lawsuit. Sandstrum Law, law done right –