By R. Duane Frizell, partner and Jonathan C. Callister, partner, Callister & Frizell
This article is not an attack on the widespread use of arbitration. Good arbitrators daily shoulder the burden of adjudicating parties’ rights in a manner that is economical and sound. That said, as with anything, there are risks. Businesses need to consider them before agreeing to arbitration or including arbitration clauses in contracts. This article is not an attack on the widespread use of arbitration. Good arbitrators daily shoulder the burden of adjudicating parties’ rights in a manner that is economical and sound. That said, as with anything, there are risks. Businesses need to consider them before agreeing to arbitration or including arbitration clauses in contracts.
“As a matter of public policy, Nevada courts encourage arbitration and liberally construe arbitration clauses in favor of granting arbitration.” The same is true in Federal court. Moreover, unlike mediation, arbitration is generally binding. Thus, a party cannot usually walk away from or retry an arbitrator’s decision.
The U.S. Supreme Court has noted that the benefits of arbitration may include “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” Nevertheless, these assumptions do not always hold true. There are also some additional tradeoffs.
Arbitration is not always cheaper than court. Arbitration filing fees are usually higher. Furthermore, parties do not have to pay judges, but they do have to pay arbitrators. That can get expensive, especially if there is more than one. Large deposits are often required upfront.
Many believe this is offset by arbitration’s shorter and limited discovery (attorney fact-finding). Hence, the argument goes, attorney time and fees are reduced. This may be true in some cases, but certainly not all. Often, a party can convince an arbitrator to allow for as much, or nearly as much, discovery as in a court case. In addition, although the discovery time is usually shorter, that often only compresses the process, making monthly attorney fees higher over a shortened period of time—with no net savings and perhaps a net loss.
It is not uncommon for arbitrators to be attorneys (or even lay persons) without any expert knowledge and with less experience than a judge. Some industries do have arbitration associations, but even those may not result in better decisions. Some industry arbitrators bring no special knowledge to the table. In local trade associations, arbitration outcomes may be influenced by the prestige of local “big wigs,” even without underhanded tactics. Some associations even allow an arbitrator to throw a party’s attorney out of the room!
“In bilateral arbitration, parties forgo the procedural rigor and appellate review of the courts ….” By agreeing to arbitration, parties often unwittingly forgo such rights. Such parties may be consumers and employees, but they include businesses too. Generally, an arbitration award can be overturned only when it “was procured by corruption, fraud, or undue means”; “there was evident partiality or corruption”; “the arbitrators were guilty of misconduct”; or if the “arbitrators exceeded their powers.” This means that arbitrators’ errors of fact and law are commonly left uncorrected.
For all of these reasons, instead of agreeing to or insisting upon arbitration as a matter of course, a business person should critically think about the assumptions and tradeoffs. Factors to consider include risk management, business objectives, litigation types, arbitration experience, and the size of the business’s and its actual (and potential) adversary’s pocketbooks. And by all means, talk to an attorney!