Why Arbitration?

Increasingly, companies are including arbitration agreements in their contracts with employees, customers, and each other, with the idea that arbitration will shield them from unwanted cost, delay, publicity, or liability. Among other things, there is a general consensus that arbitration avoids wasteful and expensive discovery, leads to quicker and more predictable outcomes, and sidesteps messy jury trials. But are these popular beliefs accurate? And if so, under what circumstances?

Is Arbitration Efficient?
What’s the most efficient way of handling a dispute? The answer depends on several factors, including the complexity of the disagreement, the nature of the harm alleged, the amount of discovery allowed, and jurisdictional consideration. The answer is not necessarily arbitration.

To make arbitration work, parties need to be strategic about choosing the rules that govern and control the process as well as how they employ them. Depending on the rules adopted or agreed to and the parties’ respective litigation strategies, arbitration can be every bit as time consuming as litigation in courts, perhaps more so.

And unless discovery is materially limited (which may or may not benefit the company, depending on the case), arbitration can be even more expensive. In addition to the costs of the discovery itself, the parties must pay the typically hourly fees of arbitrator—or three of them in many cases—as well as the administrative fee charged by companies like the American Arbitration Association and Judicial Arbitration and Mediation Service.

Is Arbitration Fair?
The results are not always predictable. Although arbitrators of legal disputes are supposed to apply “the law,” they are not subject to the same scrutiny or accountability as the courts. Rather, the law applicable to arbitrations significantly limits the rights of parties to appeal. This can be good or bad—again, depending on the case. One the one hand, companies like it because it reduces the likelihood of long, drawn-out appeals that sap resources while delaying the final outcome. On the other hand, a “wrong” outcome is not easy—and is often not possible—to redress.

As a rule, arbitration awards cannot be appealed simply because one party finds the decision unfair. Other grounds must exist, such as corruption or fraud by the parties, evident partiality or corruption of the arbitrator(s), misbehavior by an arbitrator that results in prejudice to a party, or an arbitrator misuse of power. Absent one of these grounds, a wrong result cannot be corrected as it can with a court case, where the right to appeal is guaranteed. This fact is often underappreciated at the stage of drafting an arbitration clause, before any dispute has arisen.

Nor can the right to appeal be materially expanded through in drafting an arbitration clause. The Federal Arbitration Act sets a “floor” on the due process required in arbitration. Among other things, the ability to appeal an arbitration award for unfairness or other (limited) statutory grounds cannot be waived in a contract. But appeal rights cannot be expanded or defined in a contract, either. The parties are “stuck” with the ability to appeal only in cases where the process itself is corrupted—not where they disagree with the results.

–Miles Yanick