Arbitration is a form of alternative dispute resolution (“ADR”) that offers the opportunity for practical resolution of disputes on the merits in a process that is based on party autonomy and control.
Implemented properly, business or commercial arbitration can avoid the time, expense, and uncertainty of court proceedings. Business arbitration is particularly useful when parties want disputes resolved in a business setting – privately and efficiently by a decision-maker with industry sector expertise.
What Is Arbitration?
Arbitration has been part of the dispute resolution landscape for centuries.i It provides an opportunity for practical, time and cost-efficient resolution on the merits. Arbitration is viewed by most companies as the preferred means to resolve commercial (business-to-business) disputes.
Arbitration has many advantages over litigation in court, such as party control of the process; typically lower costs and shorter time to resolution; flexibility; privacy; awards which are final and enforceable; decision-makers who are selected by the parties on the basis of desired characteristics and experience; and broad user satisfaction.
While there has been much discussion in recent years as to whether mandatory arbitration of disputes involving consumers and employees is appropriate, consensual arbitration between businesses (“B2B disputes”) has long been and continues to be widely recognized as a fair, beneficial, and efficient means of dispute resolution. This discussion is limited to arbitration of B2B disputes.
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.
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 depositions), the conduct of the hearing (including testimony by live video), the length of time for the entire process, as well as pre-screening the arbitrators for disclosure issues and availability.
Length of Time
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 issuance of an award. In some states with larger caseloads the time period is much longer. In New York, for example, it took 22 months longer to get to the trial than it took to the issuance of an award in an arbitration.ii
If one also considers the time for an appeal, on average cases reviewed on appeal in federal court from filing through appeal took 21 months longer than filing to award. Again, in some states with larger caseloads, the time period is even longer. In New York, for example, it took 33 months longer through appeal than to the issuance of an award.iii
In recent years, significant cutbacks in state court budgets have impacted the amount of time required to adjudicate cases in court.iv
Delays in 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
Attorneys’ fees and expenses are by far the most significant cost of litigation, and they increase in direct proportion to the time to resolution of 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 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 appeals and court proceedings are far more limited in arbitration than in court.
Arbitration is a flexible process that permits parties to organize 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 individual needs; 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 for some or all of the witnesses in lieu of time-consuming, oral direct testimony.
When negotiating their underlying commercial contract, parties often include provisions in the arbitration clause that will enhance the efficient conduct of any arbitration that might thereafter arise. Most commonly, such clauses set time limitations for concluding the entire arbitration, as well as limitations on interim phases such as discovery and commencement of the hearing. It is far easier for the parties to agree on such matters when they negotiate their commercial contract than when a dispute has actually arisen and the parties are in an adversarial relationship.
The flexibility of arbitration 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.
Arbitral hearings are held in private settings and are attended only by those designated by the parties and their counsel, in contrast to trial proceedings held at the courthouse, 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 are seldom granted. Most arbitral institutions have specific rules regarding the confidentiality of proceedings and awards and the laws of some jurisdictions provide for confidentiality. As long as the proceeding stays in the arbitration forum, confidentiality can be preserved by the agreement of the parties.
Confidentiality is an important feature for many corporations, 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.
A great benefit of arbitration is that the parties can select their arbitrators, both under the party-appointed system and the list system, and thereby choose arbitrators with qualifications tailored to the needs of the arbitration in question. These desired qualifications can include attributes such as subject matter expertise; reputation for competence; temperament; the number of years of experience; the number of arbitrations chaired; availability; and commitment and ability to conduct an efficient, cost-effective arbitration.
The ability of parties to select arbitrators with desired specific expertise and competence contrasts with most court cases where judges are assigned randomly without regard to whether they possess qualifications particularly suited to the dispute in question.
An additional benefit is the parties’ ability to provide for a panel of three arbitrators to hear complex and/or high- dollar disputes.
Discovery & Related Matters
Unless specifically agreed otherwise by the parties, discovery and related procedures are considerably more limited in arbitration than in litigation.
In court litigation in the United States, the governing Federal Rules of Civil Procedure or parallel state court rules often allow for broad, burdensome, and expensive discovery, including lengthy depositions and the extensive production of electronic data.
The parties in arbitration may limit discovery and engage in other cost-efficient procedures by adopting guidelines such as the New York State Bar Association’s Guidelines for the Arbitrator’s Conduct of the Pre-Hearing Phase of Domestic Commercial Arbitrations and International Arbitrations.vi Among other things, these Guidelines contain significant suggested limits on processes including document discovery, e-discovery, depositions, discovery motions, and dispositive motions. Guidelines like these are binding when adopted by the parties. But even if they are not adopted, arbitrators often rely on these Guidelines as a framework for the efficient conduct of the pre-hearing phase of arbitration.
Arbitrators are actively involved in the management of the case and can conduct a telephonic or in-person supervised session to assure expeditious proceedings much more promptly than is often the case in our overburdened courts.
In many cases, it is important that commercial disputes be resolved quickly and finally because drawn-out indecision significantly increases costs and may cause business paralysis. Arbitration provides finality and does so quickly and economically 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 a court’s ability to vacate arbitration awards except on narrow grounds, which are difficult to prove and rarely succeed.
In some cases, parties to a large dispute may want a more comprehensive appeal than is permitted under the FAA and state arbitration statutes. They can accomplish this (without sacrificing the efficiency of arbitration) by providing for an appeal to a second arbitrator or panel of arbitrators on traditional legal grounds. An appeal within the arbitration framework can be conducted quickly and cost-effectively, without significantly delaying the final resolution of the case.
Studies have repeatedly and conclusively shown that arbitrators do not split the baby. For example, a 2015 study showed that in only 7% of the cases were damages awarded in the mid-range of 41-60% of the amount claimed, results almost identical to a similar study conducted eight years earlier.vii
International Commercial Disputes
Arbitration permits the parties to choose adjudicators with the necessary special expertise to decide a cross-border dispute, a choice that is not available in court. This special expertise can include knowledge of more than one legal tradition (e.g., common law and civil law), experience, understanding and ability in harmonizing cross-border cultural differences between parties, and fluency in more than one language.
In the international context, arbitration provides a uniquely neutral forum for dispute resolution and enables the parties to select decision-makers of neutral nationalities or of recognized neutrality who are detached from the parties and their respective home state governments and courts. Thus, arbitration avoids any perceptions of potential bias and provides reassurance that the rule of law will be observed. Arbitration also avoids delays in court which, in some jurisdictions, can exceed five or even ten years.
A critical feature of international arbitration is the existence and effective operation of the New York Convention to which over 150 nations are parties. The Convention enables the enforcement of international arbitration agreements and awards across borders. In contrast, judgments of national courts are more difficult and often impossible to enforce in other countries.
Studies Prove That Arbitration Is an Effective Process
Satisfaction – Studies have shown that a majority of users believe arbitration is better, cheaper, and faster than litigation.viii
Fairness – Studies have shown that 80 percent of attorneys and 83 percent of business people report that arbitration is a fair and just process.ix
International – Studies have shown that 86% of corporate counsel are satisfied with international arbitration.x
Expertise– Studies have shown that the majority of parties find arbitrators since they can be chosen by the parties, to be more likely to understand the subject of the arbitration than judges.xi
Lack of bias – Studies have concluded that three arbitrators are less likely to be influenced by unconscious biases than is a single decision-maker.xii
Compliance with awards – Studies have shown that the rate of voluntary compliance with arbitral awards is over 90%.xiii
Financial benefits – Studies have shown that speedier resolutions result in significant financial benefits to all parties as parties know what they owe or are owed and can move forward with their lives and businesses.xiv
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.
ii – Roy Weinstein, Efficiency and Economic Benefits of Dispute Resolution through Arbitration Compared with US District Court Proceedings. March 2017. Court data based on officially reported statistics issued by the United States government. Arbitration data furnished by the American Arbitration Association.
iii – Id.
iv – Id.
v – Id.
vi – International Chamber of Commerce Commission on Arbitration, Techniques for Controlling Time and Costs for Arbitration.
vii – Guidelines for the Arbitrator’s Conduct of the Pre-Hearing Phase of Domestic Commercial Arbitrations and International Arbitrations
viii – Study by the American Arbitration Association, AAA®-ICDR Awards do not Split the Baby
ix – Rand Institute for Civil Justice, Business to Business Arbitration in the United States, Perceptions of Corporate Counsel (“Rand”), p. 1, 30 (2011).
x – PriceWaterhouseCoopers, International Arbitration, Corporate Attitudes and Practices, (“PWC”), p. 8 (2008).
xi – Rand, supra note viii at p. 32.
xii – Chris Guthrie, Misjudging, 7 Nev. L.J. 420, 451-453 (2007).
xiii- PWC supra note x at p. 8.
xiv – See Weinstein fn. 1 supra. See also, B. Roy Weinstein & Stevan Porter, Economic Impact on the County of Los Angeles and the State of California of Funding Cutbacks Affecting the Los Angeles Superior Court (Dec. 2009), available at http://www.micronomics.com/articles/LA_Courts_Economics_Impact.pdf.