The world of commercial arbitration is undergoing a change—and not everyone is happy about that. Twenty years ago, corporations with a legal dispute essentially had two options: negotiate or adjudicate. If they decided to adjudicate, they had two main choices. Parties could queue up at the courthouse for conventional litigation—with its panoply of discovery and motions, public trials, formal rules of evidence, and one or more levels of appeal. Alternatively, they could opt for the “rough justice” of an arbitration process that afforded little or no discovery or motion practice, let all the evidence in “for what it’s worth,” but did produce a final and binding decision, albeit often with little explanation or legal analysis. Litigation could take more than five years and cost many thousands (or even millions) of dollars. Arbitration was usually completed, with varying degrees of satisfaction, in three to six months, and at a fraction of that cost.
NEW LANDSCAPE Today, the whole landscape of commercial dispute resolution has changed.
There is a bewildering array of dispute resolution processes to choose from: mediation, neutral case evaluation, mini-trial, summary jury trial, neutral expert fact-finding, and arbitration, among others. Moreover, some corporate counsel complain that arbitration in commercial cases is becoming nearly as time-consuming and expensive as litigation. Why use arbitration at all, they ask, if getting an arbitrated resolution will take just as long and cost just as much as litigation? Even some arbitrators decry what they see as unhealthy trends in the commercial arbitration field: excessive discovery and motions, lengthy briefs, and protracted hearings.
Are these expressions of alarm warranted? Clearly there are instances of arbitrations getting out of control, especially in the hands of less-skillful arbitrators. But that happens in litigation as well. Those who worry that arbitration is becoming more like litigation are missing a subtle but important shift. Increasingly, in high-stakes commercial disputes, counsel insist on a process that provides many features of traditional litigation:
- Substantial discovery into fact-intensive, complex matters.
- An opportunity to clarify and focus the proceedings through preliminary rulings or dispositive motions on some or all of the issues.
- Opportunities for pre- or post-hearing briefing of difficult or novel legal issues.
- A substantial, reasoned opinion that explains the basis of the decision to stockholders, investors, or regulators. At the same time, these parties also want other features not found in conventional litigation:
- The right to pick their decision-maker.
- A confidential forum in which the evidence and outcome are private.
- The opportunity to choose the time and location of the hearing.
- The right to specify as much or as little discovery as they want.
- The right to vary the normal rules of procedure to fit the needs of a particular case.
- Quick and informal access to the decision-maker (usually through conference calls) to resolve discovery disputes, scheduling issues, and other procedural matters.
- Responsive and efficient administration.
- A likelihood that the decision-maker will be prepared, focused, experienced, thoughtful, and sensible.
- A final and binding decision at the end of the hearing, rather than years of appeals, remands, and possible retrials.
This kind of arbitration—combining features of traditional litigation and arbitration—provides the best process for resolving major, complex commercial disputes. While the cost may be about the same as litigation, its other attributes make it preferable to either litigation or the oldstyle “quick and dirty” arbitration.
Given that arbitration is entirely a product of party agreement, there is nothing sinister or alarming about delivering this sort of arbitration to the market sector that wants it. Such arbitration is particularly appealing to the largest, most sophisticated corporations with high-dollar disputes. In a recent survey of 300 corporate counsel, Fulbright & Jaworski found that 91 percent predicted that use of arbitration in commercial disputes will remain at its present level or increase in the years ahead. Counsel from the largest companies (those valued at more than $1 billion) were most supportive of arbitration.
Obviously, the more elaborate form of arbitration is not appropriate for all cases. Many matters (particularly, simple cases with lesser sums in disputes) should be arbitrated through a scaled-down, expedited process.
Happily, since parties drafting contracts may customize provisions from either “streamlined” or “comprehensive” rules in nearly any combination they wish, the commercial arbitration world of today offers a full spectrum of processes.
THE NEED TO CHOOSE The fact that parties can now specify in their contracts an arbitration model that reflects one of an unlimited number of gradations between most streamlined and most elaborate imposes on them an obligation to give this matter some careful thought. Too often, when major transactions are being negotiated, someone says at the last minute, “Shouldn’t we throw in an arbitration clause?” Frequently, the one hastily snatched off the shelf is a legally sufficient, but quite uninformative “standard clause.” Years later, when a demand for arbitration is filed and the arbitrator is trying to resolve disputes between the parties concerning whether each side should get one day of depositions or 10, whether the hearing should last three days or 20, and whether the hearing should be held in New York (where claimant’s witnesses live) or Los Angeles (where respondent’s witnesses are based), this standard clause will give the arbitrator little guidance about what the parties intended. The arbitrator will try to come up with a fair answer based on the size and complexity of the case, the degree of urgency involved, and similar factors.
Given that most commercial cases involve interstate commerce and are thus subject to the Federal Arbitration Act, the arbitrator will likely recall that one of the act’s few grounds for vacating an award is the refusal of the arbitrator “to hear evidence pertinent and material to the controversy” and will thus probably resolve close calls in favor of more extensive evidence-gathering and presentation.
To avoid forcing an arbitrator to design the arbitration after the dispute has arisen, wise companies will want to do some planning. Corporate counsel should sit down with their transactional lawyers and litigation/arbitration counsel early in every contract negotiation to ask, “What types of disputes are likely to arise under this contract and what kind of process would we like to use to resolve each type?” Frequently, a good initial answer is a “mediation/arbitration” clause, sometimes also called a “step clause,” which requires the parties to try mediation either as a precondition to arbitration or as an adjunct to an arbitration already filed. Given that top commercial mediators typically bring about an agreed settlement 70 to 80 percent of the time, the requirement of a mandatory mediation preceding any arbitration is well worth the effort.
When it comes to delineating the type of arbitration for different kinds of disputes, consider the following questions:
- Should the arbitration be administered by a recognized arbitration service or the parties themselves? (The latter choice can involve frequent trips to the courthouse if the parties cannot agree on arrangements).
- Which rules will apply and should they be modified? (While neither the parties, nor the judge can change federal or state rules of civil procedure to suit a particular case, arbitration parties can agree to tailor the usual arbitration rules any way they want.)
- What should be the scope and extent of discovery, especially depositions? (Providing in the contract, for example, that each side may have 30 hours of depositions, as happened in a recent case I arbitrated, determines the parameters for one of the most labor-intensive aspects of any adjudication process.)
- Where should the hearing be held? (Often, a good answer, and one not available in court, is that claimant’s witnesses will be heard in the city where most of them are located and respondent’s witnesses will be heard in the city where most of them are located.)
- How will the testimony of nonparty witnesses be taken? (Usually, this can best be done by taking videotaped depositions of the witnesses in their home cities or having the arbitrator adjourn the hearing to such locations to hear them live.)
- What will be the length of the hearing? (By specifying in advance, for example, that the hearing will last five days and that each side will have 20 hours to use however it wishes, an expectation of the appropriate scale of the proceeding is created.)
- Will there be any limitation on remedies (for instance, punitive damages)?
- Will dispositive motions be allowed?
- Will the arbitrator have authority to award attorney fees and other costs to the substantially prevailing party and, if so, based on what factors?
- Will there be one arbitrator or three? (Except for extraordinarily protracted or technical hearings, one is generally sufficient.)
- Will the arbitration award be whatever decision the arbitrator considers most appropriate (“standard arbitration”), or a dollar amount within boundaries set by the parties (“high/low arbitration”), or a choice between the parties’ final offers (“baseball arbitration”)?
- Will there be an appeals option in which the parties select a panel of three appellate arbitrators to review the decision?
Once this kind of analysis is done, those negotiating the transaction will be able to make informed choices between the transaction details and getting as many of their dispute-resolution choices included in the agreement as possible.
Even in so-called ad hoc arbitration, where the parties to a dispute had no pre-existing contract, astute corporate counsel will want to perform the same sort of analysis and try to persuade the opposing party (or the arbitrator) to conform the arbitration as closely as possible to the model derived from their analysis. Since this sort of planning is still relatively rare in even major commercial cases, those who perform it will typically be several steps ahead of opposing parties who have given the matter little thought.
THE BOTTOM LINE There is little doubt that the face of commercial arbitration has changed significantly over the past few decades. However, far from being a cause for despair, perceptive users will recognize the change as a welcome enlargement of their options. Traditional arbitration is still there for cases, big or small, where that is what the parties want. But also available now is an almost infinite variety of arbitration models which, while not always cheaper than litigation, offer distinct advantages over what is available at the courthouse.
Those in-house and outside counsel who are knowledgeable about the many ways in which arbitration can be structured are increasingly taking the time to decide, and specify in their contracts, the sort of dispute resolution process they want. Like so many other things in life, doing such planning can pay big dividends. Those who don’t are likely to be left at the starting gate grumbling that “arbitration just ain’t what it used to be anymore!”
Retired D.C. Superior Court
Judge Curtis E. von Kann is an arbitrator and mediator in the D.C. office of JAMS, the country’s largest ADR company. He can be reached at cvonkann@jamsadr.com.