News
February 23, 2005
David L. Evans
617 226-3445
Shareholder
Areas of Concentration
Business Litigation
ADR
Computer Law
Office
Making Arbitration A Better Alternative
by David Evans
Alternative dispute resolution, particularly arbitration and mediation, has become the preferred vehicle for resolving many business disputes. Indeed, if one examines the flow of litigation in New England, the dockets are dominated by personal claims such as contractors' efforts to enforce mechanic's liens, claims resulting from physical abuse, and "slip and fall" or other personal injury suits.
ADR is perceived by businesses as offering a more flexible, predictable and economical means for the management of complex business problems. For ADR to fulfill these expectations, however, there are differences that business people need to understand in pursuing remedies outside of the judicial process.
If, for example, your company's dispute is consigned to ADR simply because someone reflexively dropped a boilerplate arbitration clause in a contract, ADR might not offer a better alternative to the courts. This is why it is vital to give up-front attention to the dispute resolution process and not simply hope for the best once hostilities have arisen.
From a cost perspective, arbitration can be just as expensive as litigation, particularly where the arbitration involves three arbitrators, not one. There is almost no commercial dispute that warrants a three-member panel, and certainly not a panel comprised of two party-appointed arbitrators and a sole neutral - an anachronistic protocol that merely adds another pair of advocates to a proceeding.
The running costs of such cases can be astronomical, because it entails at least five professionals (three arbitrators plus lawyers for both parties), and scheduling can therefore become difficult.
Businesses must also be cognizant that arbitration rules are often vague and repose substantial discretion in the arbitrator. As a consequence, the scope and duration of the proceedings cannot confidently be predicted. If a dispute is litigated in a Massachusetts court, detailed rules of procedure will govern the case and principles of law will be applied and then subjected to appellate oversight.
One important innovation we have seen in Massachusetts is the advent of the business session, a dedicated department of the Superior Court for the adjudication of complex business disputes. The assigned judges work diligently to move cases expeditiously toward trial and manage cases through discovery.
The bulk of expense associated with any controversy can be in the discovery process. This holds true in arbitration as well. Arbitrators are taught that discovery in arbitration should not replicate judicial proceedings. However, there are few specific rules instructing an arbitrator as to discovery matters.
The arbitrator is given broad latitude in the absence of guidance in the arbitration agreement itself or subsequent arrangements of the involved parties. If left to their own devices, lawyers can easily transform arbitration into full-fledged litigation, with depositions of every conceivable fact witness and paper discovery such as interrogatories and requests for admissions.
Arbitration is a private process and, if there is no direction in the arbitration clause, the arbitrator is not required to issue a 'reasoned' award explaining the grounds for the decision. No body of authority is created to inform industry participants on the standard of care, and, in any event, awards do not constitute precedent even when published. The prospect of contractual disputes over the same exact issue is therefore more probable than when the issue is settled in court.
Avoid Boilerplate Language
The time to consider the merits of arbitration is during contract formation. Arbitration clauses should not be pulled from a formbook, i.e., "any and all differences arising under or relating to this agreement shall be resolved by arbitration…." They should instead be tailored for the type of dispute likely to be generated by the business arrangement.
Below are some areas to consider.
Number and qualifications of arbitrators. Specify any credentialing requirements for the arbitrator, and the number of arbitrators. Should the arbitrator be a lawyer, retired judge, or industry expert?
Duration and timing of hearings. Specify the time allocated for the hearings and when the hearings must commence and conclude. Arbitrations can drag on for months (in some cases years) if not properly managed. These parameters can be, and often are varied by the parties, but they at least provide the security that the proceedings will not go on indefinitely.
Discovery. Specify the discovery that will be permitted. While document discovery is often essential, consider carefully restricting depositions of fact witnesses. A possible exception is with witnesses whose testimony will be critical and who cannot be compelled to attend and testify at the hearings.
Location. Specify the location for the hearings.
Dispositive Motions. There is some debate in the ADR community as to whether an arbitrator may dispense with the hearings and decide the case using the judicial motion to dismiss or summary judgment standards. Accordingly, best practices would suggest specifying whether the arbitrator is empowered to consider dispositive motions.
Award. Specify whether the arbitrator will be required to issue a reasoned award articulating the rationale for the decision. Generally, an arbitrator has 30 days to issue an award. Consider whether this time period is appropriate.
Remedy limitations. Specify the scope of relief that may be awarded by the arbitrator. Should the arbitrator be empowered to award punitive damages, attorneys' fees or injunctive relief?
If you cannot spend the time and effort to consider the contours of an arbitration provision before the contract is signed, you should seriously consider staying in court. When properly crafted, however, arbitration clauses can pave the way for a more economical proceeding, where the parties' positions are thoughtfully considered and adjudicated in a timely fashion.
Assuming that the arbitration provision can be appropriately tailored to the anticipated dispute, business people often ask: "What are the benefits of arbitration?"
While there are various schools of thought on this, the principal advantage is simply the relative assurance that the outcome will be less dependent on the vagaries of fact finders with little or no experience in the evaluation of business disputes.
When faced with the question of, "Will we win in court?" any responsible lawyer will necessarily qualify his or her response because of the idiosyncrasies of juries (and of judges, some might argue). Having presided over nearly 100 cases as an arbitrator, and participated in a like number as an advocate, it has been my experience that arbitration claims are almost always resolved on the merits, without regard to circumstances akin to jury nullification.
There is far less of a likelihood of a totally unpredictable result. These benefits for planning and budgeting purposes cannot be overlooked. For this reason alone, we will continue to see increasing use of arbitration for business disputes.
David Evans is a shareholder at Hanify & King PC where his practice focuses on business litigation, ADR and computer law. He has represented large public corporations, closely held companies and individuals in the resolution of complex business disputes. Evans also represents clients in federal and state court, arbitration, mediation, and administrative agencies. He has litigated precedent-setting cases in areas such as leveraged buyouts, computer law, unfair trade practices, and patent licensing.
