ARBITRATION OF BUSINESS DISPUTES

Introduction:

The United States is justly famous for the complexity and expense of its legal system which permeates all aspects of its commercial and business life. It is also a system which is remarkably effective in enforcing the rights of the parties, especially if the parties were knowledgeable enough to create written legal documentation relating to their transaction. Assuming a party has sufficient economic resources and commitment to utilize the legal system of the United States to protect its rights, then the system is one in which a fair trial is available to all and the power granted to a party represented by competent legal counsel within the system is significant. It is truly possible for a small entity or even an individual to challenge the largest company and obtain a trial in court in which a jury of six to twelve citizens will judge the matter.

The problem often encountered is the expense of litigation. Put simply, what makes the American legal system so effective in ferreting out the truth is also what makes it so expensive...the powerful and prolonged "discovery" stage of litigation during which the parties, before trial, have the right to force witnesses and the opposing parties to answer questions under oath, both orally and in writing. (See Litigation Article.) Most civil cases engage in such discovery for a year or more and the result is that the average American civil jury trial may cost in the neighborhood of one hundred thousand dollars, with major trials costing hundreds of thousands of dollars. Even a relatively small civil matter can cost tens of thousands of dollars. For this reason, well over 90% of the cases settle before trial (but after some discovery) since the costs and risks of such trials are so prohibitive. This, in turn, means that a knowledgeable defendant can usually assume that an offer of 60-80% of the demanded amount will often be accepted by the plaintiff simply because the plaintiff will spend more than the differential in the costs of going to trial. The cost of trial becomes a major factor in evaluating the strength of any case.

There are several ways to avoid this automatic discounting of a claim. First, putting in various contractual clauses regarding awarding costs and attorneys fees to the prevailing party radically alters the entire cost benefit analysis since the losing party will be required to pay the attorneys fees and costs of the winning party. Clear and concise wording of duties and responsibilities in the written documentation may also cut days or even weeks off a trial and save that much more money. (See Article on Commercial Transactions.) But by far the most effective means of avoiding the cost of the American legal system is to opt for a private trial in which the judgement of a jointly appointed neutral person is enforceable in a court of law. This procedure of having a private judge try the matter is called Arbitration and in the United States will not occur unless it is agreed to by the parties, either before or after the dispute arises.

Types of Arbitration:

The types of arbitration that the parties may select are myriad with all the Courts encouraging the use of arbitration in the strongest possible terms to avoid overcrowding the courts. In its simplest form, the parties may simply agree on the identity of a third neutral party who will hear their respective arguments and evidence and make a binding decision. In most cases, however, the parties submit the matter to arbitration under the auspices and according to the rules of one of the long standing organizations that exist worldwide to provide arbitration services, such as the American Arbitration Association or the International Chamber of Commerce Arbitration.

If the Parties' contracts do not provide for specific procedures as to how arbitration is to occur and the parties cannot informally agree between themselves as to procedures, most states have statutes that provide binding procedures for how the arbitration is to occur. Most states allow the Parties to alter those procedures by mutual agreement. We recommend to our business clients that they should incorporate the rules and regulations of one of the arbitration organizations, usually the American Arbitration Association ("AAA") since their procedures are fair, courts are familiar with them and likely to enforce any decision, and their auspices are world wide. The International Chamber of Commerce ("ICC") has also recently improved their procedures and is now often recommended. Within the United States, retired judges have formed their own private courts, called JAMS or EndDispute which are more expensive than the AAA or ICC but have the benefit of a trained judge hearing the matter. In the United States, the courts will almost always enforce an arbitration award unless truly outrageous misconduct is committed by the arbitrator, such as receiving bribes or acting in an incoherent manner. Normally, the courts will NOT retry the case but will automatically enforce the judgement of the arbitrator absent showing of bias, fraud or the like on the part of the arbitrator.

Procedures in Arbitration:

While the Parties can always agree on what procedures to incorporate in an arbitration, if they do not but can only agree to have arbitration, the statute or the rules of the arbitration association will impose the procedure. In most cases, the strict rules of evidence seen in Court are relaxed somewhat, no jury is provided, merely an arbitrator or a panel of three arbitrators, and their judgement, once rendered is then entered in court by motion of the prevailing party.

Most arbitrations and the AAA follow the basic form of an American court trial: both sides get to make an opening statement; the plaintiff presents its case by testimony and documents with the witnesses being cross examined by the defendant; defendant then presents its case by documents and witnesses who are, in turn, cross examined by the plaintiff; then closing arguments by both sides. Unlike a judge in a public trial, Arbitrators often become quite active in the arbitration, asking questions, advising the lawyers what evidence to present, and "managing" the entire matter in a way familiar to our clients used to European or Asian courts. Nevertheless, most arbitrators do follow the basic procedure of an American court room and cross examination, opening and closing arguments and the like are common.

American rules of evidence may be rigidly enforced by the arbitrators but seldom are. Quite often arbitrators allow types of evidence, such as written statements, that would not be allowed in a court of law due to the Hearsay Evidence rules. Discovery is normally restricted to exchange of documents and lists of witnesses: the tremendous expense of depositions and written interrogatories is eliminated unless the parties agree to the contrary. Arbitration is also a private forum. The public has no right to attend (as in American civil trials) and until the motion to enforce the award is entered in the civil court, there is usually no public record of the dispute at all.

Advantages and Disadvantages of Arbitration:

The advantages of arbitration are immediately apparent: arbitrations are faster and less expensive than court trials, usually taking less than six months from beginning to end and costing perhaps half as much as a civil trial. They are also private forums so that competitors and the public do not have access to information and testimony that the parties may not wish to have made public. They also avoid the emotionalism often evident in a trial by jury since "professionals" such as judges and attorneys are normally the arbitrators rather than typical citizens who may have seen too many movies about trials to behave in an entirely objective manner.

The disadvantages are significant, however. Arbitrators are given tremendous latitude in their procedures and judgements and absent outrageous conduct or judgements on their part, the Courts will not review their actions. While in civil courts the judges are held to strict application of the law and the complex procedures and rules of evidence, the courts have consistently held that such strict compliance is NOT required of arbitrators who may use any and all equitable procedures or common sense and fairness to determine how to hear a matter. This gives the typical arbitrator far more power than the average judge.

The various arbitration associations do have rules which are to be adhered to and most arbitrators are lawyers or judges and instinctively apply, albeit in more informal ways, the standard rules of procedure and evidence. Nevertheless, assuming an arbitrator is incompetent or unfair, there is little that can be done about it unless the arbitrators' conduct is completely unreasonable. Indeed, the Courts have even held that an error of law by the arbitrator will NOT result in the court overturning the arbitrator's decision.

The best method to counteract the lack of effective appeal of a bad decision of an arbitrator is careful selection of the arbitrators who will hear the matter. Both the AAA and the ICC provide for relatively detailed procedures by which the parties may select from lists of arbitrators and strike out ones that seem inappropriate. Biographies of the arbitrators are provided and the parties are well advised to check out the background and reputation of the arbitrators before selecting them since once selected, the arbitrators are nearly impossible to remove.

Overall, most business clients still prefer arbitration to litigation in court for the simple reason that it is quick, relatively inexpensive and private. While the power of the arbitrator may be a danger, so is the power of a judge and jury and most arbitrators, who hear only a few dozen cases in their entire careers, are likely to invest a great deal attention and care to the fair and effective handling of the arbitration. Most arbitrators do an excellent job and given the expense and publicity inherent in litigation, the overwhelming majority of businesses provide for arbitration in their written contracts and transactional documents.

When confronting a jurisdiction in which the courts are either inefficient or subject to improper influence, providing for arbitration is an absolute prerequisite to practical enforcement of any contract or right. By international treaty almost every country provides for enforcement of arbitration awards in their national courts with consequent ability to attach the assets of the defendant. It is also important to understand that the type of case presented and the method of presentation alters significantly in arbitration versus the court or jury trial. Arbitration is usually a business forum, not an emotional one and the presentation is expected to be professional, business like and efficient. The attorney long used to jury trials in which emotional arguments are used to persuade lay people or who engages in dramatic and aggressive cross examination finds the arbitrator more annoyed than persuaded and it is critical to adjust tactics accordingly.

Mediation:

Mediation is a relatively new method used by parties to seek to resolve their differences by use of a professional neutral who hears the matter but has no power to render a final decision. The mediators often can be called in with only a few days notice and meet and confer with all the parties to seek a common ground for settlement. If either party elects to reject settlement, the mediation is abandoned. Mediation is normally used in conjunction with either arbitration or litigation and what is stated in the mediation process can not be used in the arbitration or court at a later time should no settlement occur. Mediation is remarkably effective for settling disputes, especially if conducted after discovery has progressed to the point where the parties are aware of the evidence (in litigation) or if the facts are relatively ambiguous (in arbitration.) Mediation can be attempted at any time during the case, be it litigation or arbitration occurring.

Conclusion:

Few businesses elect the expense of litigation if arbitration is available. Put simply, arbitration is a business like forum for resolution of business disputes and while the elaborate safeguards of the legal system are often not available, the need for prompt and private resolution of disputes seems to convince most of our business clients to elect to insert arbitration clauses in most of their contracts. Indeed, some of our clients consider a refusal to agree to an arbitration clause on the part of the other party negotiating a contract as sufficient cause to reconsider the entire transaction, feeling that rejection of such an efficient system of dispute resolution displays too aggressive an attitude. And for those clients used to non American systems of law, arbitration seems a welcome and familiar way to resolve disputes and protect the rights of the parties.

It is critical to remember that the only way to ensure the right to arbitrate a matter is to agree to it in the contractual documents. Absent both parties agreeing, binding arbitration is not available in the United States for commercial transactions or most business disputes.

These Articles are to give the reader a general description of certain areas of the law. Legal advice is necessary to apply these legal concepts to your particular situation. The Reader should obtain competent legal advice before relying on the Articles.

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