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Published: 2008-03-26

To Arbitrate or Not to Arbitrate: Clients should carefully consider agreement for binding arbitration



Clients often view arbitration as a method to resolve disputes that is preferable to litigation in the court system. This preference is frequently based on the belief that arbitration is more efficient and cost-effective than the courts. Moreover, many clients believe that the procedures employed in arbitration are free of the "technicalities" that may frustrate a quick and fair resolution of a controversy. As a result of these common perceptions, many clients insert mandatory arbitration clauses in their contracts and, when confronted with a lawsuit, seek to have the matter transferred to some type of arbitration.

A client should carefully consider whether he or she wishes to forego the courts and be bound to resolve disputes through arbitration. Often, arbitration fails to offer the advantages that clients believe are inherent in this alternate method of dispute resolution. In addition, arbitration lacks many of the court system's fundamental structures that help assure fairness.

Most clients favor arbitration because they believe it is quick, efficient and cheap. Unfortunately, arbitration oftentimes does not live up to these expectations.

The greatest cost of any dispute resolution method is the amount of time that the parties and their lawyers must spend to obtain a determination. Put simply, the longer the proceedings and the more procedural gyrations the parties must endure, the more expensive the undertaking.

One cost advantage of arbitration is that "discovery" is not available. Under the more common rules of arbitration, the parties are generally not permitted to depose witnesses, serve interrogatories or make extensive documents demands. The elimination of pre-hearing discovery avoids a good part of the costs associated with litigation under the court rules. Arbitrators, however, have considerable discretion in managing pre-hearing proceedings. It is not uncommon for arbitrators to permit some type of discovery. Generally, arbitrators will require the parties to exchange documents. Depositions, moreover, are becoming increasingly more common in arbitration. Thus, at least insofar as discovery is concerned, arbitration is beginning to resemble court litigation in the amount of time and money the parties must expend on pre-hearing procedures. Arbitration hearings, moreover, are not necessarily faster than trials. The amount of testimony, demonstrative evidence and documents that are necessary to prove a case does not somehow magically decrease simply because the forum is an arbitrator instead of a judge and jury.

Moreover, the "informality" of arbitration may actually serve to lengthen hearings. The rules of evidence generally do not apply in arbitration proceedings. Accordingly, arbitrators are deprived of the basic tools to bar irrelevant, repetitive, unreliable or prejudicial materials. In the absence of well-defined rules of evidence, arbitrators sometimes tend to accept almost all the materials offered to them. Such broad acceptance of "evidence" necessarily increases the time of any hearing.

The use of private arbitrators also causes delay. Judges are paid to hear cases all day, every day. Once a trial starts, especially a jury trial, a judge will generally proceed with the matter from day-to-day until it is completed. (One notable exception to this rule is practice in the Chancery Division of the New Jersey Superior Court, in which many judges devote only one or two days a week to trials.)

Unlike judges, most arbitrators are professionals in private practice with more varied demands on their time. Accordingly, many arbitrators may be able to devote only one or two days a week to an arbitration. As a consequence, 5 days of hearings may be spread over as many weeks. If a hearing panel consists of more than one arbitrator, scheduling difficulties multiply. Large gaps in time between hearing dates also causes some repetition of evidence and testimony.

The fees for arbitration far exceeds the costs of the court systems. If an organization sponsors or co-ordinates the arbitration, that organization may charge a fee for its services. Those fees can sometimes be considerable, and charges in the thousands of dollars are common.

In addition, the parties must pay for the arbitrator's time. If the arbitrators are professionals, such as lawyers or accountants, fees could be as high as $1,000 or more a day. These fees are, of course, multiplied if more than one arbitrator is on the hearing panel.

In contrast, the fees to the litigants in the court system is minimal. In New Jersey, such costs are generally limited to filing fees and charges for service of process. These costs usually remain well below $1,000 for the entire case. In any event, litigants in the court system do not pay the judges' salaries. Unlike arbitration, the court system can rely on taxpayers to pay for most of its expenses.

The arbitration process, moreover, lacks several of the important safeguards found in the court system. For example, arbitrators generally do not follow the rules of evidence. The rules of evidence, however, serve an important purpose. They are the filter that excludes incompetent or unreliable proofs from a trial. This filter, moreover, has been refined by judges and lawyers after use in countless trials over several centuries. The evidence rules are, therefore, a time-tested safeguard of procedural fairness. An arbitration, however, can be conducted without this safeguard.

In addition, no meaningful right of appeal exists in arbitration. New Jersey has adopted a statute, N.J.S.A. 2A:24-1, et seq., that governs the enforceability of arbitration awards. The statute is modeled on the Federal Arbitration Act, 9 U.S.C. §1, et seq. Under either the New Jersey or federal statute, a court may overturn an arbitration award only under the most extreme and limited of circumstances, such as fraud or corruption. As one court noted, an arbitration award is generally subject to judicial modification only if it contains an error that is "on its face gross, unmistakable, undebatable, or in manifest disregard of the applicable law and leading to an unjust result." Perini Corp. v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479, 496, 610 A.2d 364 (1992).

The absence of a meaningful appeal accelerates the final resolution of the dispute by removing another step in the litigation process. This removal, however, may be the excision of an important safeguard of fairness.

An appeal is, essentially, a device of accountability. A judge who is subject to appellate review is, at the least, aware that someone else will examine the correctness of his or her decision. Such accountability often engenders greater care and diligence in examining the evidence and drawing conclusions from it.

An appellate process also requires the lower tribunal to articulate the reasons for its decision. The mere process of justifying a result is an antidote to careless or arbitrary judgments.

Furthermore, tribunals make mistakes. The mistakes may not result from corruption or prejudice, but simply from a misunderstanding of the law or a failure to correctly assess the importance of certain evidence. An appeal is a method to correct such mistakes. This type of correction, however, is not possible in the arbitration process.

In summary, arbitration proceedings may not be as quick, cheap or efficient as a client may wish. Arbitration proceedings may also lack important safeguards for fairness. No doubt arbitration is a suitable method to resolve a host of disputes. In many circumstances, a client's best interest may be best served by foregoing the court system and relying upon arbitration. Nonetheless, before making such a choice, a client should be fully aware of consequences of selecting arbitration over the court system.