The right to a jury trial in civil lawsuits is protected by the U.S. and most state constitutions. However, many commercial agreements include an “arbitration clause,” whereby the parties agree that any future dispute will be resolved in a private dispute resolution process instead of a civil lawsuit. This article discusses different forms of arbitration and important factors that a party should consider before deciding whether to agree to an arbitration clause.
What is Arbitration?
Arbitration is a form of alternative dispute resolution (or “ADR”). Instead of an aggrieved party filing a civil lawsuit, the party files a written Demand for Arbitration with a private arbitration organization, such as the American Arbitration Association. The arbitration organization then appoints one or more “neutral arbitrators” to decide the dispute. Neutral arbitrators are often practicing attorneys or former judges. The neutral arbitrator(s) will typically determine what information the parties need to exchange (which is known as “discovery” in a court proceeding), allow the parties to submit their respective arguments (sometimes in writing, but often in the form of live testimony) and will render a written decision. There are federal and state statutes – such as the Federal Arbitration Act – which provide that the ruling of a neutral arbitrator can be “confirmed” in a court of law, at which point it will have the same force and effect as a judgment in a civil lawsuit.
Who is Required to Arbitrate?
Because arbitration deprives the litigants of their constitutional right to a jury trial, there must be a binding agreement to arbitrate. This is typically found in an “arbitration clause” in a contract. Such clauses generally state that, if there is a dispute in the future between the contracting parties, they agree to resolve that dispute in arbitration. There are some state statutes that require arbitration clauses in certain contracts (such as employment agreements) to be initialed by both parties to be enforceable.
What are the Advantages of Arbitration?
One potential advantage of arbitration is that it is private. By contrast, most court proceedings and filings are open to the general public. To the extent a potential dispute could cause negative publicity for one or both of the litigants, there is a clear benefit to arbitration.
In theory, arbitration is also supposed to be more cost effective than a civil lawsuit. An arbitration proceeding is supposed to move faster than a court proceeding. Also, because the rules of evidence in arbitration are relaxed and discovery is supposed to be limited, the legal fees in an arbitration are often lower than the legal fees in a civil lawsuit. Finally, the ability to appeal an arbitration award is very limited, which can save the winning party the cost of an appeal.
What are the Disadvantages of Arbitration?
In practice, arbitration is not always a lower cost alternative. For one thing, the neutral arbitrators deciding the dispute are typically paid by the hour, usually at rates comparable to an experienced attorney ($400 to $600 per hour). In complex disputes involving a panel of three arbitrators, the result can be hundreds of thousands of dollars in arbitrator charges. In addition, many arbitrators do not significantly limit discovery, which can dramatically increase the cost of arbitration. Finally, arbitrators are less likely to dismiss claims early in a proceeding. Experienced litigation attorneys will often complain about arbitrators allowing a proceeding to continue over claims that would have been summarily dismissed by a judge in civil court proceeding.
Another disadvantage is the limited right to appeal an arbitrator’s decision. As a practical matter, this means that the arbitrators are not strictly bound by the law and are free to fashion what they deem to be a more “equitable” result – such as splitting the amount in controversy rather than clearly ruling in favor of one party or the other. In many jurisdictions, the courts will only overturn an arbitration award if the arbitrator evidenced a “manifest disregard for the law” or failed to disclose a conflict of interest.
Should You Agree to Arbitrate?
Whether to accept an arbitration clause in a contract is a complex question that requires careful consideration. For example, businesses dealing with consumers often want to include arbitration clauses in their contracts because it can prevent consumer class actions. Similarly, as noted above, if a potential dispute involves highly sensitive subject matter, the privacy afforded by arbitration can be beneficial. Contracting parties should not, however, blindly accept arbitration clauses in their agreements without weighing the benefits and disadvantages with their counsel.
For questions on this article, please contact the author, Simon Malko. If you would like to learn more about MMM's Litigation practice, click here.
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