Contractual Arbitration Provisions: Are They Worth Keeping in Your Business Contracts?

 

Garrett J. Olexa

Arbitration of grievances is one of the oldest forms of alternative dispute resolution. The Federal Arbitration Act passed in 1925, and over the years the United States Supreme Court has rendered a number of decisions that solidified its use as a form of alternative dispute resolution. By the mid-1980s the American Arbitration Association experienced a significant spike in the use of its services. Some of the reasons private arbitration gained in popularity was it was seen as a more expeditious and economical alternative to traditional litigation. Another reason some favored arbitration was the finality of the arbitrator’s decision. That is, once the arbitrator’s decision was handed down, there were extremely limited grounds upon which it could be overturned. As arbitration gained in popularity, arbitration provisions stating all disputes were subject to private arbitration were inserted into more and more business contracts. However, in more recent years, in many ways, arbitrations have more closely resembled traditional litigation and the finality which was once so desired has come to be seen by many businesses as reason not to invoke arbitration.

 

For instance, while once a less costly alternative to filing a lawsuit, today some private arbitrations can be just as costly, and, at times, even more costly than litigation. In addition to incurring expenses typically found in litigation (e.g. witness fees, attorneys’ fees and discovery costs), arbitration costs will also include administrative fees and hourly charges for the arbitrator’s time.

 

In addition, although arbitration was once perceived to be a much faster process, it is not uncommon for business disputes resolved through arbitration to take just as long, or longer, than similar litigated matters. While arbitrations were traditionally engaged in with little discovery, today many arbitration hearings are preceded by extensive discovery.

 

While the purported finality of an arbitration decision has long been identified as one of its benefits, it has also come to be seen as one of its greatest drawbacks. In arbitration, there is very little recourse for the party rendered a losing decision, even if it is legally incorrect. An arbitration award, generally, may only be challenged if the impacted party can clearly demonstrate that arbitrator was corrupt, biased, or exceeded his or her authority; however, such challenges are often very difficult to prove. Even a challenge based on the arbitrator having exceeded his or her authority is a narrow one. Just because an arbitrator makes errors of fact or law does not mean he or she exceeded authority. Further, many arbitration provisions do not clearly spell out the scope of arbitrator’s authority. In such instances, it is unlikely that an arbitrator will be found to have exceeded authority for awarding things such as punitive damages, costs, attorneys’ fees, interest, or even sanctions. Basically, the arbitrator can misapply the law or err with respect to factual determinations and there is nothing the losing party can do, unlike with litigation where judges’ decisions are subject to appellate review. Given that an arbitration award has the same binding effect as a judgment (i.e. it bars a second suit involving the same parties based on the same cause of action, transaction or occurrence), having a binding award against you with very little recourse can have a potentially significant impact on your business.

 

In short, while arbitration was once seen as a more efficient, less costly alternative to litigation, in many instances those businesses with arbitration agreements now face similar shortcomings to litigation, a lack of predictability in the outcome, and the absence of the opportunity to have a mistakenly rendered award reversed. Thus, if you are a business whose standard business contract includes an arbitration provision, it may be time to meet with an attorney to assess whether arbitration is still the best form of alternative dispute resolution for your business and, if it is, to ensure that the arbitration provision in your contract is specifically tailored to maximize the benefit to your business.

 

*Garrett Olexa is a member with the law firm of Jennings, Strouss & Salmon, PLC. He practices in the areas of business law and commercial litigation.  Mr. Olexa can be contacted at golexa@jsslaw.com or 623.878.2222.