Arbitration Expert Predicts 21st Century Trends


Thomas J. Stipanowich, a law professor at the University of Kentucky and a nationally- recognized expert in the field of arbitration, presented his views on the future of arbitration at the ADR Section's Annual Meeting on September 16, 1998.

Arbitration confronts an uncertain future as we approach the next century. Although arbitration enjoys widespread use, it is also subject to unprecedented criticisms from varied quarters. Employee and consumer advocates decry the lack of due process in arbitration as compared with judicial forums. At the same time, many business persons bemoan the increasing "litigization" of the process.

Professor Stipanowich offered five predictions for arbitration over the next few years.

1. Reform of the primary standards governing arbitration will reflect a tug of war between the perceived need for "enhanced process" and the desire to return to the "first principles" of arbitration.
A committee of the National Conference of Commissioners on State Laws is revising the Uniform Arbitration Act for the first time in more than forty years. This drafting process has inspired a debate regarding the extent to which the "bare bones" approach of the current statute should be modified to address perceived needs of modern commercial arbitration. At the same time, the broad sweep of the Federal Arbitration Act ("FAA") has led some to call for simultaneous reform of the FAA.

The views of needed reform fall into two separate camps. Some believe we need more rules to address the realities of modern complex arbitration. Others counter that we are in danger of making arbitration a poor carbon copy of litigation by adopting too many rules.

One of the sharpest topics of debate is the standard for judicial review of arbitration awards. Currently, both state and federal arbitration statutes set forth very limited grounds for review. The debate over standards of review has increased as courts have recognized the authority of arbitrators to award punitive damages and to enforce "mandatory arbitration" in claims involving statutory rights.

In recent years, some parties have attempted to establish their own higher standards for review by inserting specific provisions in arbitration agreements. Many, but not all, courts have enforced such provisions. The drafters of the revised Uniform Arbitration Act are considering the possibility of establishing a clearly erroneous standard of review for awards of punitive damages and attorneys' fees and to recognize that parties may contract in their agreement for judicial review of errors of law prejudicing the rights of a party. However, many hurdles remain before the revised act is issued by the Conference of Commissioners and before any revision becomes law.

2.There will be a trend toward more choice and away from the "one size fits all" concept of arbitration.
Because of its expanding use, arbitration must retain sufficient flexibility to meet the goals of the individual case, however simple or complex, and the specific goals of the arbitrating parties. The problem is that arbitration procedures normally are established when parties enter into a contract prior to the existence of the dispute.

One solution to the flexibility challenge is reflected in recent modifications to the American Arbitration Association's Construction Industry Arbitration Rules. These rules were revised to establish three discrete tracks for cases of different sizes and levels of complexity: fast- track rules for smaller cases; regular-track rules; and large, complex track rules for cases over $1 million. The AAA is beginning to reflect this flexibility in other of its rules as well.

Major international bodies, such as the International Chamber of Commerce and London Court of International Arbitration, have also reformed their rules. The new ICC Rules are designed to get the case to the arbitrators more quickly and reduce procedural uncertainties.

Liberal judicial enforcement of arbitration provisions has also spawned the growth of a wider range of providers and programs, such as the National Arbitration Forum in Minneapolis, a consumer-oriented provider, and the CPR Rules for Non-administered Arbitration of Complex Business Disputes, which envision minimal involvement by the provider beyond assistance with selection of the arbitrator. The increased number and type of providers will permit users to make a more meaningful choice to accommodate the nature, size and complexity of their disputes.

3.There will be a greater emphasis on professional standards and qualifications for arbitrators and arbitration institutions.
While the procedural framework of arbitration is important, it must not obscure the vital role of the arbitrator in realizing the potential of binding arbitration. Perception of the arbitration experience is more likely to revolve around the personality and practices of the process manager than any other aspect of arbitration.

To meet this challenge, the single most critical reform attempted by the AAA in recent years is the significant reduction in the size of its national panels, the simultaneous institution of higher experiential standards and the development of training programs for different commercial venues.

Concerns regarding arbitral quality and integrity have also motivated recent reforms in the selection procedures. AAA, for example, now seeks more input from parties in arbitration selection and evaluation. The Securities Industry Conference on Arbitration has adopted a list selection procedure akin to that used by AAA. The NASD has proposed a change to its rules along substantially similar lines.

There are increasing calls for more emphasis on ethical standards for commercial arbitrators. The ABA/AAA Code of Ethics for Arbitrators in Commercial Disputes is overdue for revision. A working group of the ABA Section on Dispute Resolutions Committee on Arbitration is developing proposed revisions to that Code of Ethics.

There is also an increased focus on arbitration institutions. The reality and perception of impartiality and fairness is as essential in the case of ADR institutions as it is in the case of individual neutrals. When an agreement mandates arbitration, the administering institution should be independent and impartial. In the long term, the independence of administering institutions may be the greatest challenge of consumer ADR.

4. There will be greater scrutiny of arbitration agreements in so-called "adhesion" contracts.
Encouraged by recent Supreme Court and Appellate Court opinions broadening federal arbitration law under the FAA, more businesses have incorporated arbitration provisions in customer and individual employment contracts. However, because consumer and employment contracts often involve something other than arms-length negotiation of terms and frequently consist of a mandatory arbitration provision that is presented on a "take-it-or-leave-it" basis by the supplier of goods or services, there are legitimate concerns regarding the fairness of these conflict resolution mechanisms. Concerns regarding the fairness of arbitration provisions in standardized agreements characterized by elements of "adhesion" (such as employment and consumer contracts) have spurred debate on several levels.

A few states have undertaken to establish specific requirements governing the enforceability of certain kinds of arbitration agreements, including those in consumer contracts and franchise agreements. It is clear, however, that such limitations will be preempted by the pro-arbitration policies of the FAA within the broad scope of interstate commerce. Although some courts have overturned agreements to arbitrate on grounds of unconscionability or reasonable expectations, most courts rarely refuse to enforce arbitration agreements on these theories under the FAA. There are, however, some signs of change. Courts are beginning to look more carefully at arbitration processes, especially when the issue involves arbitrability of statutory discrimination claims under individual employment contracts.

These concerns have led to various due process protocols and community standards. Several of these standards have evolved for governance of arbitration agreements. The employment due process protocol developed by a multi-disciplinary task force in 1995 was cited in the much-noted opinion Cole v. Burns International Securities Service, 105 F3d 1465 (DC Cir., 1997).

In April, 1998, the National Consumer Disputes Advisory Committee signed a due process protocol for mediation and arbitration of consumer disputes, a statement of principles to establish clear benchmarks for conflict resolution processes involving consumers. The protocol was approved by the AAA and includes several principles including reasonableness of costs, reasonableness of location, reasonableness of time limits and the right to representation. There is also a health care protocol which was published this summer, the product of a national commission comprised of representatives of the ABA, AAA and the American Medical Association.

The most immediate effect of the various protocols will be to guide the AAA in the development of policies and procedures affecting conflict resolution in the consumer area. It is hoped that other organizations will follow AAA's lead in adhering to the minimum standards described in the protocols. The extent of their impact remains to be seen.

5.Arbitration will no longer stand alone.
The dramatic growth in the use of mediation and other informal third-party intervention processes has increased implications for arbitration agreements. What will be the long-term impact of the growth of mediation and other informal intervention strategies? Are they a threat to arbitration?

Professor Stipanowich believes quite to the contrary. He argues that mediation and other settlement-oriented intervention procedures may prove to be the best thing that ever happened to arbitration. As an adjudicative process, arbitration, like court trial, is to be avoided in most cases. Arbitration should be the ultimate in a series of deliberate steps usually beginning with unaided negotiation or low-level intervention by a third party. Recently the nation's leading standard construction contract was modified to incorporate a requirement that parties participate in mediation prior to arbitrating. More and more, multi-step conflict resolution provisions are replacing the boilerplate arbitration clause.

This leads increasingly to the problem of neutrals wearing multiple hats. An arbitrator is asked to mediate or a mediator is encouraged to arbitrate or provide an advisory opinion. One might well question whether any individual can fill both roles sequentially without undermining one or both. The CPR Commission on the Future of Arbitration hopes to provide specific guidelines for such circumstances.

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In summary, Professor Stipanowich believes that arbitration will survive and continue to perform a valuable function in the field of alternative dispute resolution. There will be more flexibility, more choice, better quality of arbitrators and institutions and more fairness. Arbitration will be seen not as an end in itself but as part of an overall process that affords all parties the benefits of fast, private and better-controlled resolutions of disputes.