Home Law Second thoughts on arbitration for business dispute resolution

Second thoughts on arbitration for business dispute resolution

In recent years, many businesses, frustrated by the time required to resolve controversies in court, have increasingly turned to arbitration for what they believe can be a quicker, less expensive forum for contract dispute resolution.

The calculus, however, is not that simple. Many times a court provides a more just result at a lower cost. Arbitration remains quicker, but is often expensive. With very limited remedies to overturn an erroneous or unfair decision, the outcome of arbitration can often be arbitrary.

The right to arbitrate

As a general rule, the ability to arbitrate a dispute requires an agreement evidencing the consent of both parties to resolve the dispute by arbitration. Careful attention needs to be paid to arbitration clauses; they are not all the same. When properly drafted, an arbitration clause will define the issues and scope of the arbitration, the forum before which the arbitration will occur, the number of arbitrators, the manner in which the arbitration proceeding is to be conducted, the law to be applied and the method of electing to arbitrate.

Finality of an arbitrator’s decision

Having made the decision to arbitrate, you should be aware that the decision of an arbitrator is difficult to overturn. If you believe you have a solid case, the finality of an arbitrator’s decision may be a good thing. However, if the arbitrator does not share your view of the case, or if they make a totally unexpected decision — even one not based on the law or facts — you have little redress.

After an arbitration award is issued, the parties may resort to court to either enforce the award, or to set it aside. If you prevail in an arbitration, and the remedy calls for performance or payment over time, you would be wise to have the arbitration award affirmed by a court. A state court judgment will give you the power to make sure the other side honors the arbitrator’s decision. If you fail to do so within 90 days of the date the award is delivered, you are generally precluded from doing so.

But what happens if you lose the arbitration? You have the same 90 days to challenge the award, but the criteria for challenging an arbitrator’s award are limited.

Unlike a trial before a court, you may not have a complete and accurate record of what occurred. Every word spoken in a judicial trial is recorded, and every document considered by the judge in rendering their decision must meet longstanding evidentiary rules before it can be considered.

Neither of these protections hold true in an arbitration. Unless the parties agree to engage a stenographer, whatever is said in an arbitration remains private, and therefore is not subject to review. The arbitrator’s memory controls. Additionally, arbitrators are not bound by the rules of evidence. They can consider documents that a court would exclude as unreliable. If your dispute involves something both sides want to keep private, this procedure may be advantageous. However, if you lose, your ability to have the decision overturned is significantly reduced, since the record for review is not developed.

One of the reasons that arbitrations can proceed with less formality is the limited scope of review applied to an arbitrator’s decision. An arbitration award will be upheld when the arbitrator “offers even a barely colorable justification for the outcome reached.” A court will not overturn an arbitration award based on errors of law or fact. As long as there is “some plausible basis” for the award, a court is powerless to overturn it, even if the reviewing court believes the factual findings or legal conclusions of the arbitrator to be unsound.

Limitations of post-arbitration review

This deference to an arbitrator’s decision was illustrated by a recent appellate court decision that upheld an arbitrator’s decision to rewrite a contract between the parties to include provisions the parties had not agreed to.

According to the appellate court reviewing the award, the arbitrator’s decision to rewrite the parties contract would not pass muster if it was done by a court:

“While a court’s grant of reformation based on this record might constitute reversible error, the arbitrator’s determination here passes muster, given the extremely limited scope of our review of an arbitration award … We acknowledge [the] argument that the arbitrator, in determining the amount of the … capital contribution that petitioner was obligated to make … re-wrote the parties’ agreement in a manner that could not withstand scrutiny as a rational construction of the terms of the contract as written. The result the arbitrator reached, however, is supportable as a reformation of the parties’ agreement, given the highly deferential standard of review accorded arbitration awards” [Matter of Rose Castle Redevelopment II LLC v. Franklin Realty Corp., Appellate Division, First Department,  6/11/2020].

In the Rose Castle case, the decision to arbitrate rather than litigate cost the losing party an additional $9 million. The losing party had no meaningful right to overturn the decision, even though it would have been reversed if it had been decided by a judge.

If your case is supported by the law, you should carefully consider whether you want to engage in arbitration. Doing so generally involves a limitation on your ability to seek meaningful appellate review, even if the arbitrator’s decision is contrary to the law.

Costs

Unless the cost of delay is significant, arbitration is considerably more expensive than proceeding in court.

The fees incurred to prosecute a case in New York Supreme Court are relatively little, at a cost of $95. Filing a request for a court to make a decision generally involves a $60 motion fee and a one-time administrative fee of $160. Thus, it is possible to have a state court decide your dispute for $315. The amount of a court’s time consumed by a dispute is not passed on to the litigants.

Arbitration fees vary depending upon the forum you choose and the type of proceeding. The American Arbitration Association charges both “administrative fees” and “arbitrator fees.”

The amount of the administrative fee is different depending upon the type of case. For example, the American Arbitration Association has different rules for commercial, consumer, construction, employment, labor and class actions. A commercial dispute has an “initial fee” and a “final fee,” which vary based upon the amount in dispute. The smallest fee (for disputes of $75,000 or less) is $1,725 — a $925 initial fee and $800 final fee. A case with a $1 million dispute will incur $16,175 in filing fees. A case with a disputed amount greater than $1 million but less than $10 million will incur filing fees of $24,750.

In addition to administrative fees, parties to an arbitration are required to pay for the arbitrator’s time, generally on an hourly basis. Unlike the courts, arbitrators charge for all time devoted to the case. Arbitrators charge for status conferences, reading submissions, thinking about submissions, presiding over hearings and writing decisions. The hourly fee for an arbitrator is set by the arbitrator and disclosed in advance. The parties can agree on an arbitrator, or if they cannot agree, limit the choices to a designated few, with the American Arbitration Association making the final selection.

On average, arbitrator fees range from $500 to $850 an hour. Some arbitration agreements provide for three arbitrators rather than one. In those cases, the hourly fees triple. Arbitrator fees can mount quickly and become a significant expense. In addition, arbitrations often involve fee shifting, meaning that the losing party is more likely to be saddled with both sides’ legal fees as well as the arbitrator’s fee.

Comparing the two, it is evident that a judicial proceeding is far less expensive. Further, in the event either party seeks to confirm or vacate the arbitrator’s award in court, the moving party would incur the same $315 in court fees.

Speed of a decision

Courts generally tend to be slower than arbitration. In cases where delay is a significant cost, it may be preferable to proceed with arbitration.

However, where arbitration is not available or not desired, the parties to a judicial dispute can make decisions that will expedite the speed at which a court can render a decision.

The first choice involves the forum. As a general rule, federal courts move cases along more quickly than state courts. Federal courts can limit the number and type of cases they decide, resulting in a smaller docket, and federal judges generally have a larger staff to assist them in deciding cases.

In state court, judges have to decide almost all cases that come before them. They have much larger caseloads, and fewer assistants to help them with their larger workload. Business disputes, however, can often be expedited by selecting the commercial division of the court for dispute resolution. Commercial division judges are experienced in business disputes and their procedural rules generally favor quicker decisions.

Another way to expedite state court proceedings is to request certain forms of relief when the case is commenced, on an emergency basis if required. Preliminary relief can include injunctions preventing or directing an adversary’s behavior, attaching or seizing assets or property, placing encumbrances on real estate, appointing a receiver and — in very limited circumstances — ordering the arrest of a person. If granted, these remedies may expedite a resolution of the entire proceeding. Careful attention should always be devoted to determining whether your case qualifies for this type of relief and to the drafting of persuasive papers to encourage a court to grant this type of relief.

Interestingly, arbitrators do not have the power to grant this type of relief. However, if you are committed to arbitration, by contract or choice, you can request a court to order this type of relief as an “aid to arbitration,” or to prevent your adversary from taking an action that would render the ultimate decision of an arbitrator meaningless.

Conclusion

The decision on whether to arbitrate or litigate is complex. It is often made when a business enters into a contractual relationship, without the benefit of knowing what the dispute is about, what the relevant facts are and whether the law favors your position or not. Unless there are clear, objective reasons why arbitration is favored, a business should not assume that arbitration is the most efficient or just forum for dispute resolution. The lack of meaningful appellate review, the limited standards imposed upon arbitrators’ decisions and the significant cost of arbitration often weigh in favor of judicial resolution of business disputes.

Jeffrey D. Buss is a founding member of the firm Smith, Buss & Jacobs LLP. He is in charge of the firm’s Litigation Department.
Smith, Buss & Jacobs LLP, founded in 1991, is an AV-rated, 22-lawyer firm that represents clients in the areas of corporate law, real estate law, commercial trials, federal and state appeals, renewable energy, intellectual property and cooperative and condominium law.

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