The latest round of budget-cutting in Sacramento has had a profound effect on the local court system. In San Francisco, for example, the Presiding Judge is warning that newly-filed cases may not come to trial for five years. In other courts, it now takes months to obtain a hearing on routine motions rather than the usual 30 days. These delays may prove intolerable for plaintiffs, but even defendants may need to have court actions decided at an early date, to remove a cloud on their businesses. Is it time to consider binding arbitration as an alternative?
Arbitration is a binding proceeding conducted by a private, for-profit organization. With few exceptions, if there is an arbitration clause in a contract, the court will force the parties to have all forms of disputes settled in arbitration. Once the arbitration is conducted and an award issued, it can be converted to a regular court judgment and then enforced like any other judgment. Unless you can show that the arbitrator was bribed or other extreme circumstances, the court will not set aside an arbitration award.
Before agreeing to arbitration, however, there are several strategic considerations:
Arbitration offers several advantages over court proceedings. These include:
· Privacy. Most court files are open to inspection by courts and your competitors. Trials are public. Arbitration files are not open to inspection and hearings are private.
· Timing. The parties control the timing of motions and trials in the arbitration process. Most cases are decided by the arbitrator in 4-8 months. Motions for emergency relief can often be arranged within a day or two.
· Flexibility. Courts run on their own schedules and your matter is competing with many others for the judge’s attention. In arbitration, the parties determine when the matter is ready for hearing, how many days will be allotted, etc. Arbitrators are interested in repeat business, so they try to be accommodating to parties and counsel.
· Experienced Decisionmakers. In most proceedings, the parties can engage an arbitrator who has experience in a particular industry or type of case. Often, an arbitrator will have expertise in personal injury matters, construction claims, or insurance coverage. The arbitration clause in the contract may specify a certain type of arbitrator (retired judge, real estate attorney with 10 years of experience, etc.).
· No jury trial. Juries are hostile to some types of businesses and disputes. In California, there is no way to avoid a jury if you are in court – contractual clauses that waive a jury trial in advance are not enforceable. So, if you do not want to face a jury, the only sure method is arbitration.
· Discovery costs. In theory, at least, the amount of pretrial discovery and hearings is reduced. Most arbitration processes require full disclosure of relevant documents and witnesses up front and limit the number of depositions. However, the arbitrator has power to allow more depositions and other pretrial discovery, as warranted by the complexity of the case.
· Location. Clauses in a contract designating a place for trial are often unenforceable in court, and you can find yourself sued in a remote part of the State. A clause specifying that the arbitration hearing will be conducted in a particular state or county usually will be honored.
Arbitration also has several drawbacks which should be weighed before deciding on this option:
· Cost. There is a processing fee due at the outset of arbitration. For the American Arbitration Association, the filing fee is steep and is based on the amount at issue (for example, the fee for a case involving $500,000 is over $6,000). The parties then pay for the arbitrator’s time, often at $600 per hour or more. In contrast, the filing fee in Superior Court is around $400 and the judge’s salary is paid by the State.
The arbitrator’s fees can be significant. During a recent arbitration of a partnership dispute that involved several prehearing motions and three days of testimony, the two sides incurred over $25,000 apiece.
· No Appeal. In court, set rules of evidence and procedure apply. If the judge or jury makes a mistake, you have the right to appeal. The possibility of appeal forces judges to pay close attention to legal principles. In contrast, there is usually no appeal from an arbitration award. If the arbitrator ignores your evidence, fails to apply legal precedent that would be binding in court, or refuses to enforce parts of your contract, you have no remedy. Because there is no appeal, some arbitrators issue awards that are based more on perceived fairness rather than on strict application of the law. Accordingly, there is an element of uncertainty in the arbitration process, making it difficult to predict outcomes.
· Fewer Settlement Opportunities. In court, the parties are encouraged to go to mediation, and the court conducts at least one mandatory settlement conference before trial. These processes force the parties to consider settlement with the assistance of a neutral third party. In arbitration, these pretrial procedures are not the norm. Parties frequently find themselves appearing on the first day of the arbitration hearing without having been through any type of settlement process. This disadvantage is often overlooked.
How Can Lawyers Help?
At the contract stage, it is important to understand the nature of the disputes that might arise and weigh the benefits and drawbacks of arbitration. If arbitration is the preferred course, legal counsel can fine-tune the arbitration provision to best serve your needs. Not all arbitration services are the same – some have higher quality arbitrators and well-defined procedures in place. There are several designer options – including discovery limits, appeals, and prearbitration mediation – that might be included.
Once a dispute arises, the critical first step is selecting the arbitrator. Attorneys who are experienced in arbitration can help choose an arbitrator who is a stickler for the law, or one who is more open to considerations of fairness and equity, depending on the nature of your dispute. During the arbitration hearing itself, procedures and evidentiary requirements are less formal, and are often a trap for inexperienced counsel. Be certain that the lawyer has been through enough hearings to know the differences between arbitration and trial.
In the end, arbitration may be preferable to a long wait in court and less costly as well. But there can be hidden drawbacks to the process that may outweigh the benefits. Consider all of the strategic implications before signing a contract that mandates arbitration.