GENERAL BUSINESS ISSUES

ARBITRATION – PRO OR CON

An Article by William A. Taylor (The Business Lawyer)

ARBITRATION. The word is pre-loaded in partnership agreements and other contracts where the parties are offered a chance to avoid long and expensive litigation in favor or an informal process designed for speedy resolution of disputes. What should a business person know about arbitration to effectively choose it over litigation and to effectively use it when needed?

Informal but Deadly Serious The process and some arbitrators are quite informal; the arbitrators don’t wear black robes and many of them dress casually during the hearing. That belies the reality that arbitration is a very serious process that was designed to produce final resolutions to disputes.

Binding Arbitration Back when the contract or other agreement was being signed, the parties were asked if they wanted “binding” arbitration. Binding arbitration produces results that cannot be appealed to court by the losing party. The loser can appeal but the lawsuit will be dismissed for lack of jurisdiction; the arbitration was “binding.”

If binding arbitration was not chosen, you should know that courts are generally reluctant to overturn on appeal an award that was granted after a hearing. It will help your appeal if the arbitrator committed fraud, corruption or some other misbehavior regarding your case. That being highly unlikely, an appeal is not to be expected to succeed. Also, technically, a wrong decision by the arbitrator is not grounds for appeal unless the parties have previously agreed to that point.

Finally, you should know that, quite unlike mediation, arbitrators are unlikely to apportion victory between the parties. They tend to award all or nothing; winner-takes-all. So, for all of those reasons, if the dispute is a close one that could honestly go either way (51/49), don’t select “binding” arbitration and preserve your ability to appeal.

Written Opinion of the Award If binding arbitration was not selected and the award goes to the other side, a written reasoning of the arbitrator will be helpful in the appeal. However, the reasoning must be requested prior to the beginning of the arbitration; and, without the request, arbitrators are not required to give their reasoning – and usually don’t.

Since most parties only look for the “bottom line” from the arbitration process (the winner and amount of damages and costs to be recovered), the loser may never know what part of their case failed to be persuasive. The winner may not be interested in the arbitrator’s reasoning, however, because the written reasoning will be helpful in an appeal by the loser.

The Process Arbitration starts with the contract provision or a mutual agreement prior to litigation that the parties will avail themselves of alternative dispute resolution. The first step in the process is to select the one or three arbitrators to hear the dispute. The next step is to prepare your case, or have your attorney prepare your case, almost as thoroughly as for trial. Next is the presentation of the case before the arbitrators. Finally is the receipt of the award.

Selecting the Arbitrator One of the most important steps in the arbitration process is selecting the arbitrator. The object is to select someone(s) who will understand and be persuaded by the case you will present. The American Arbitration Association provides a list and resumes of a dozen arbitrators for the subject matter of the dispute. It might require you to exclude from consideration all of the people on that list and for you to start on a second list before you find someone(s) with whom you are comfortable.

You will exclude someone who is in a conflict of interest regarding either of the parties; that arbitrator will usually recuse (exclude) himself or herself once s/he becomes aware of a conflict – and if s/he doesn’t immediately recuse, s/he should early-on disclose the relationship causing the conflict. You will exclude someone who has a reputation not suitable to your position. (Your attorney can be helpful in sounding-out the legal community to determine the history of the arbitrator prior to signing-on. Is the person conservative or liberal, a company man or a workers’ rights person, penny-pinching or bountiful?) Additionally, you may personally interview the potential arbitrator in order to make up your mind.

One Arbitrator or Three The selection (and the expense of arbitration) are complicated by the possibility of three arbitrators deciding a dispute. Many, if not most, partnership agreements and other contracts call for each party to select an arbitrator and for those two arbitrators to select a third arbitrator to form a panel. Your party-selected arbitrator, although expected to have some bias toward you (the party selecting him/her), should have some integrity (and an independent mind) and should not just be a front for the selecting party. Otherwise, the third arbitrator will disregard the opinions of the “front.” In the three arbitrator model, once the arbitration commences, there will be no informal discussions with the arbitrators by the parties. Otherwise, the arbitrators will be hindered in their abilities to freely discuss the dispute.

Putting on the Case – Witnesses Just like a trial, evidence will be presented to the arbitrator. You should know that arbitrators prefer hearing testimony from witnesses – as opposed to reading the same testimony from affidavits. The arbitrators are impressionable people too.
Depositions are a part of the trial process that is severely affected by arbitration. Depositions are question and answer sessions of witnesses that are admissible in court. They are conducted prior to the hearing and are taken before a court reporter under penalty of perjury. Depositions are expensive ($1000 per deposition) and, with their prior notice requirements, take a long time to complete. The arbitration process is most efficient in time and money when depositions are eliminated from the process.

The Hearing The case is put on by the parties or by their attorneys. If you win, don’t expect an award of attorney’s fees; they are usually given only if a statute authorizes them or if the contract calls for them.

The Appeal Spend your money elsewhere – like paying off the judgment you just lost.

ABOUT THE AUTHOR: William A. Taylor, attorney at law, does business as “THE BUSINESS LAWYERS.” He can be reached at (510) 893-9465

February 19, 2015
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