Monday, July 17, 2017

Four Factors to Consider Before Including Arbitration Provisions in Agreements

Arbitration provisions are a common feature of the agreements we review and prepare for clients.  They require the parties to the agreement to submit some or all of the disputes between them to arbitration before one or more arbitrators rather than litigating in court. 

There are several traditional justifications for favoring arbitration. Some are more persuasive than others.

Consideration #1: Arbitration is Cheaper than Going to Court

Many attorneys will justify arbitration by claiming that it is cheaper than going to court.  Savings are theoretically achieved because most arbitrations have limited discovery and little or no motion practice.  Less discovery and fewer motions to write and respond to means less attorney billing.  By contrast, a court proceeding may involve significant discovery and elaborate motions practice.  This generalization is often honored in the breach. However, a complicated arbitration can involve significant discovery.

The fees for the arbitrator or arbitrators themselves can also be significant.  In a court proceeding, the judge, the clerk and other court staff are all paid by the state or federal government.  For the cost of a filing fee (almost always less than $500), a litigant gets the benefit of all these resources.  An arbitration is not subsidized by tax money.  The parties to an arbitration pay the fees for the arbitrator (which are often more than $500 an hour), a fee for the organization that administers the arbitration (which is typically based on the amount of money in dispute) and a fee to rent the office where the arbitration will take place.  Many arbitration provisions call for multiple arbitrators, increasing fees to thousands of dollars per day.

Consideration #2: Arbitration is Faster than Litigation

Arbitration is relatively fast.  Whether it’s faster than litigation depends on your court options.  The federal courts, particularly in the Eastern District of Pennsylvania and the Court of Common Pleas in Philadelphia County, process cases very quickly.  Other state courts, for example those located in Bucks or Lancaster county, tend to move more slowly.

Consideration #3: Arbitration is More Private than Ligation

Arbitration is undeniably more private than litigation.  Nearly all filings in a court proceedings are in the public record.  Many proceedings have a verbatim record of what transpired.  Even the courtrooms themselves are open to the public.  In many courts, the public can access and download court records from the Internet.  Not so with arbitration.  The only people allowed to access the arbitration proceedings are the parties and the arbitrator.

Consideration #4: Arbitration is Final

A disappointed litigant can appeal a court’s decision at least once.  When arbitration works the way it should, the decision of the arbitrator is extremely difficult to appeal.  This helps to reduce costs and brings finality to disputes. 

But arbitration does not always go the way it should.  There are a number of procedural machinations available to an attorney wishing to avoid or delay an arbitration by challenging the arbitrator’s jurisdiction or claiming impartiality.  These sideshows can quickly eclipse the speed and finality of an arbitration.

The Take Away

Although there is an increasing emphasis on submitting disputes to arbitration, we discourage clients from kneejerk inclusion of arbitration provisions in their agreements.  The professed benefits of arbitration often fail to materialize either because the arbitrator’s fees exceed any cost savings or because the propriety of an arbitration ends up in a prolonged court battle.