What Is Commercial Arbitration?
Commercial Arbitration is a system for resolving business disputes in which the parties submit their disagreement to one or more arbitrators and empower them to decide the dispute on the merits. In essence, arbitration is a substitute for going to court.
Why Arbitrate?
Commercial Arbitration offers the parties the opportunity to design the arbitration process, specifying, for example, how much discovery will be permitted and when and how the parties will present their respective positions to the arbitrator(s) for decision. Implemented properly, commercial arbitration can avoid the time, expense, and uncertainty of court proceedings and jury trials, and it is particularly useful when the parties want their dispute resolved privately or by a decision-maker with specific industry knowledge and experience.
Arbitration between businesses (“B2B disputes”) has long been and continues to be widely recognized as a fair, beneficial, and efficient means of dispute resolution with several potential advantages over court litigation. This discussion is limited to arbitration of B2B disputes.
Party Control
Unlike litigation in court, arbitration is a creature of contract. This means that parties can agree to design the arbitration process to accommodate their respective needs and can continue to do so as the proceeding moves forward. The parties can pre-screen potential arbitrators in the selection process for disclosure issues, expertise, and availability.
Both at the contractual stage and after the arbitration has commenced, the parties can determine the nature and scope of discovery (including whether to allow interrogatories or depositions), the date and conduct of the hearing (including whether testimony is to be in person, virtual, or hybrid), and the length of time for the entire process.
Faster
According to statistics furnished by a leading arbitration provider, on average, U.S. District Court cases took more than 12 months longer from filing to the beginning of the trial than it took from the filing of an arbitration to the completion of the hearing and issuance of a final award. In some states with larger caseloads, the time period is much longer. In New York, for example, it took 22 months longer just to get to the trial than it took to complete an arbitration hearing and issue a final award.ii
If one also considers that court cases are often appealed whereas arbitration awards are not, the relative speed of arbitration is even more evident. On average, federal cases that are appealed took 21 months longer from the filing of the case to the decision on appeal than arbitrations took from the filing of the arbitration to the issuance of the final award. In some states with larger caseloads, the time discrepancy is even greater. In New York, for example, cases that were appealed took 33 months longer to be completed than it took to get to the issuance of a final arbitration award.iii
In recent years, significant cutbacks in state court budgets have impacted the amount of time required to adjudicate cases in state court.iv
Delays in the resolution of disputes can cause economic dislocation and cause disputing parties to incur the monetary losses occasioned by lost opportunity. Those sums can be significant both to the business entity involved and to society at large.v
Less Expensive
Attorneys’ fees and expenses are by far the most significant cost of litigation, and they increase in direct proportion to how long it takes to resolve the case. Attorneys’ fees and expenses can be minimized in arbitration because arbitrations are generally concluded in far less time than cases in court.
While cases litigated in court do not have arbitrator or institutional charges, the International Chamber of Commerce reports that those charges represent only 18% of the cost of arbitration.vi This 18% (and substantially more) can be recouped quickly because of the increased speed and efficiency of arbitration and the ability to tailor the arbitration to the specific needs of the parties.
Court cases generally require more counsel time and, thus, more expense for preparation and trial than is needed in arbitration. For example, broad pre-trial motion practice and exhaustive discovery pursuant to court rules of civil procedure are not common in arbitration. Many hearing-related matters which consume time and money in court are usually not part of arbitration such as extensive evidentiary issues, voir dire, jury charges, proposed findings of fact, endless authentication of documents, qualification of experts, and cumulative witnesses. Finally, post-hearing court proceedings and appeals are far more limited in arbitration than in court.
More Flexible
Arbitration is a flexible process that permits parties to devise procedures and schedule hearings and deadlines to meet their objectives and convenience. Common practices which result from arbitration’s flexibility include choosing a location for the hearing that will minimize costs; taking witnesses out of order or interrupting a witness to accommodate another witness’ schedule; continuing a hearing outside of normal business hours in order to complete a witness or to finish the hearing; taking testimony of distant witnesses by video conference or by telephone; ordering testimony so that all experts on a topic testify directly after one another or even all at the same time; and using written witness statements at times to avoid or limit time-consuming, oral direct testimony.
The flexibility of arbitration also fosters a relatively informal atmosphere. Together with the privacy of the arbitration proceeding, this serves to reduce the stress on the witnesses and on what are often continuing business relationships between the parties.
Confidential
Arbitral hearings are held in private settings and are attended only by those designated by the parties and their counsel, in contrast to motions and trial proceedings in court which are open to the public.
The parties can agree to maintain the confidentiality of the arbitration proceeding, unlike in court, where requests to seal the record must meet a high standard and are seldom granted.
Confidentiality is an important feature for many businesses, particularly when dealing with disputes involving intellectual property and trade secrets or when there are concerns about publicity or damage to reputation or position in the marketplace.
Choice of Decision-Maker
Another benefit of arbitration is that the parties can select their arbitrators, and thereby choose decision-makers with qualifications tailored to their dispute. Desired qualifications can include subject matter expertise; reputation for competence; temperament; the number of years of experience; the number of arbitrations chaired; availability; and the ability to conduct an efficient, cost-effective arbitration.
The ability of parties to select arbitrators with specific expertise and competence contrasts with most court cases where judges are assigned randomly without regard to whether they possess qualifications suited to the dispute in question. Further, in cases where a jury may be empaneled, there is more risk that complicated factual, technical or legal matters may not be fully appreciated by the jurors.
An additional benefit is the parties’ ability to provide for a panel of three arbitrators to hear complex and/or high- dollar disputes.
Better Service
Arbitrators are service-oriented. They typically are actively involved in the management of the case and, if the parties raise time-sensitive issues, the arbitrators quickly can conduct a telephone or in-person session to address those matters. In contrast, our courts are often overburdened and unable promptly to respond to the parties’ requests for assistance. Moreover, court proceedings are more frequently subject to postponements.
Finality
It usually is important for commercial disputes to be resolved in a final manner, because drawn-out indecision significantly increases costs, takes valuable time away from a business’ management, and can harm business operations. Arbitration provides finality because lengthy, expensive appeals like those encountered in court are not available under the Federal Arbitration Act (“FAA”) and state arbitration statutes. These statutes severely limit the ability to challenge arbitration awards and thereby make appeals much less likely to succeed and uncommon. Moreover, courts can and often do award attorneys’ fees and even sanctions against those who appeal arbitration awards without a sound basis for doing so.
International Expertise
Arbitration permits the parties to choose decision-makers with the expertise to decide a cross-border dispute, a choice that is not available in court. This expertise can include knowledge of more than one legal tradition (e.g., common law and civil law), experience in international law, understanding cross-border cultural differences, and fluency in more than one language.
Arbitration also enables the parties to select decision-makers who are independent of the parties’ respective home nations and courts. Thus, arbitration can avoid any perception of potential bias and provide assurance that the rule of law will be observed. Arbitration also avoids court delays which, in some nations, can exceed five or even ten years.
A critical feature of international arbitration is the New York Convention to which over 150 countries are parties. The Convention provides for the enforcement of international arbitration agreements and the enforcement of awards across borders. In contrast, judgments of national courts are more difficult and often impossible to enforce in other countries.
Arbitration Is an Effective Process
User Satisfaction. A majority of users believe arbitration is better, cheaper, and faster than litigation.
Fairness. Eighty percent of attorneys and 83 percent of businesspeople report that arbitration is a fair and just process. Similarly, 86% of corporate counsel are satisfied with international arbitration.
Expertise. Most parties believe that arbitrators chosen by the parties are more likely than judges to understand the subject of the arbitration.
Voluntary Compliance with Awards. The rate of voluntary compliance with arbitration awards is over 90%.
Financial Benefits. Speedier resolutions result in significant financial benefits because they reduce the time the parties devote to the dispute and allow the parties to move forward with their lives and businesses more quickly.
Footnotes
i – Some commentators date arbitration back to the time of the Phoenician merchants; Alexander the Great’s father, Phillip the Second, used arbitration as a means for resolving border disputes; George Washington had an arbitration clause in his will; and the English used arbitration for commercial disputes as early as 1224.
viii – Study by the American Arbitration Association, AAA®-ICDR Awards do not Split the Baby.
xi – Rand, supra note viii at p. 32.
xii – Chris Guthrie, Misjudging, 7 Nev. L.J. 420, 451-453 (2007).