|Garrett J. Olexa|
Thursday, August 20, 2015
Contractual Arbitration Provisions: Are They Worth Keeping in Your Business Contracts?
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 firstname.lastname@example.org or 623.878.2222.