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Litigation reform has been a topic of debate for many years. Rising legal costs and the downturn in the economy have forced companies to examine litigation spending more closely. Additionally, most courts are heavily backlogged, which draws out litigation and makes it more costly. As a result of these factors, binding arbitration has been growing in popularity as an alternative to litigation.
Fans of arbitration tout its many advantages over litigation. Arbitration is designed to be more private, informal, expeditious and economical than litigation. In arbitration, the dispute is referred to one or more impartial persons (called arbitrators) for final and binding determination. There are a number of not-for-profit public service organizations that offer a broad range of dispute resolution services to businesses and attorneys. The largest and most well known of these is the American Arbitration Association ("AAA").
Today, many businesses use organizations like the AAA to arbitrate their disputes. For example, securities broker-dealers and companies with high employee turnover routinely incorporate arbitration clauses into their contracts. While arbitration may be beneficial and cost-effective in these situations, it is not always a good idea for complex commercial litigation. Attorneys and their clients should carefully weigh the costs and benefits of arbitration to make sure arbitration is right for their particular situation. This article explores issues that should be considered before agreeing to participate in arbitration or adding an arbitration provision to a complicated transaction.
WHAT HAPPENED TO THE RULES?
Commercial litigators know that cases may be won or lost depending on the lawyer's knowledge and application of the rules of evidence and procedure. One major difference in arbitration is the alteration or absence of otherwise applicable rules. According to the AAA guidelines, conformity to the legal rules of evidence is not necessary. The AAA also dispenses with or modifies many of the rules of procedure, including those concerning dispositive motions, discovery and appeal rights.
The impact of the lack of evidence rules can be significant. At hearings, arbitrators are permitted to accept hearsay and affidavits. Further, because the term "relevant evidence" is very broad, arbitrators are at times reluctant to exclude evidence based on relevance. For this reason, arbitrators tend to let everything in. Also, unlike practicing before a court, parties in arbitration are not always required to lay a foundation for the admission into evidence of business records or other documents.
CHANGES TO RULES OF PROCEDURE
Changes to procedural rules in arbitration are also important. To begin with, subpoena power may be limited. Although the AAA rules allow an arbitrator to "subpoena" third-party witnesses, the enforceability of such a subpoena is questionable since the AAA is a private organization and the arbitrators are not associated with any state or federal governmental entity. To the extent third-party witnesses may be needed to testify at the hearing, a party in arbitration should not depend on the reliability of a typical court subpoena to force such witnesses to testify.
Another important change to the procedural rules in arbitration concerns dispositive motion practice. Dispositive motions can be vitally important. They can serve to conclude a dispute before the parties are forced to expend the substantial time and money necessary to get to trial. In arbitration, there is no dispositive motion practice. The parties are required to proceed to a full hearing on the merits even if your client has a viable affirmative defense which would normally be resolved by motion.
Another significant departure from typical procedural rules is in the area of discovery. Discovery in arbitration has different rules than the familiar rules of civil procedure. For example, there is often a short time frame in which to conduct discovery. This can be burdensome in a complex case. In addition, in arbitration the parties may not have to identify their witnesses and exhibits until two days before the hearing. While arbitrators sometimes enter schedules that provide greater flexibility, the baseline rules leave little time for review and preparation. In summary, while discovery in arbitration can be as costly as in traditional litigation, you may not have the comfort of knowing in advance what rules or schedules will apply.
It is important to remember that, while the AAA has its rules, the relatively informal nature of arbitration allows arbitrators, in their discretion, to modify deadlines and schedules. Arbitrators may also enter rulings that require discovery to proceed in a way that feels more like a traditional lawsuit. For this reason, when you enter arbitration, it is not necessarily clear whether to expect a "typical" informal process, or whether the arbitrators may build more formal procedures into the case. Depending on your client's perspective and the complexity of your case, the ability for arbitrators to make rulings that cause an arbitration to more closely approximate a lawsuit in terms of discovery and deadlines can be good or bad. The important point is that you should be aware of this flexibility and use it to your client's advantage if possible.
The last important departure from the procedural rules involves appeal rights. By agreeing to arbitrate, the parties agree to waive their right to a true appeal. Specifically, arbitrators' decisions regarding the law and facts are not subject to appellate review. A court may vacate an arbitration award only in limited circumstances. See Tenn. Code Ann. § 29-5-313. Considering that arbitrators are fallible, agreeing to waive the right to a meaningful appeal can be a huge gamble.
COST OF ARBITRATION
Although arbitration is designed to be an informal, cost-effective means to resolve disputes, it can sometimes be as expensive as litigation. In addition to the discovery process, there can be considerable fees for the arbitrators. An arbitration can have up to three arbitrators who will each bill by the hour. The arbitrators must also be reimbursed for their travel and other expenses. In addition, the parties frequently must pay for the use of space in which the hearing is conducted. Other fees include the AAA initial fee and service fee, which is based upon the amount of the claim or counterclaim. Of course, none of this includes the typical fees and expenses associated with any case – attorney's fees, expert witness fees, court reporter fees and so forth. In the end, it is not unusual for the expense of arbitration to be the same as that of a case filed in court.
CONCLUSION
Arbitration can be an attractive and cost-effective alternative to litigation for many cases. However, the differences in rules of evidence and procedure, and the substantial lack of appeal rights, should make you think carefully about whether arbitration makes sense for resolving complex commercial disputes.
For more information about this topic, please contact Janna Smith (jes@mglaw.net) or one of our other Litigation attorneys. |
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