Business Arbitration Can and Should Be Improved in the United States (DR Mag)


At the CPR Institute Annual Meeting in New York in January, a lively debate ensued about whether arbitration is “broken” in the United States. A number of prominent corporate general counsel expressed their views that arbitration no longer offers sufficient benefits over litigation.

They primarily cited the failure of arbitrators to control the process so that lengthy hearings, discovery, and a long time to decision created a process that had all the flaws and none of the benefits of litigation. In response, a number of the arbitrators took issue with that premise, stating that the real reason that matters tend to drag isn’t the arbitrators’ case control skills, but clients’ failure to rein in their outside counsel, as well as the obfuscation and delay tactics of outside lawyers.

Law firm attorneys blamed not only their clients, for wanting them to prolong the process and arm twist the opponent, but also the arbitrators, for failing to make the tough decisions that presumably would control the other side.

Who is right? And is there something wrong with arbitration in the United States today? Observing this debate, we were struck by the finger-pointing—and the fact that all three sides were right.

The strength of any process is undermined by failure at any point in the chain. In other words, arbitration is only as effective as its weakest link. It would be a pity if such an important and flexible private dispute resolution mechanism fell into disuse primarily because of bad habits and an unwillingness to modify and adapt the process to the situation and to modern needs.

We propose a few ideas intended to get U.S. arbitration back on track and return it to its roots: providing a fast, efficient, and cost-effective way to resolve disputes.

Is Arbitration Really Broken?

Answer: Yes. But it can be fixed.

First, arbitration issues will not be adequately addressed unless and until the arbitration community recognizes the depth of dissatisfaction expressed by the user community. Notwithstanding professional arbitrators’ views, the fact remains that many corporate counsel are dissatisfied and refuse to write arbitration clauses into their contracts. Studies show consistently that the total cost and length of time to decision in arbitration comes close to litigation.1 Aside from the repetitive cases like insurance, consumer or product liability, or industry-wide approaches like those adopted by the securities industry,2 arbitration of complex matters currently demonstrates no significant cost savings over court processes.

Second, corporate users often say they feel that the arbitrators are deliberately drawing out the process in order to increase their fees. The issue of the decision maker’s financial motivation is, of course, nonexistent in litigation; here, it indicates a fundamental lack of trust that should be directly and publically addressed. We need to honestly find out how those perceptions are created and explore methods of reducing or eliminating the problems.

Third, the lack of appeal rights is both a blessing and a curse. Clearly, the finality of the arbitrators’ decision is the hallmark benefit of a speedy, private process. Absent confidence in the arbitrator, however, the lack of appeal rights is a weakness that cannot be overcome by case management or better lawyering during the process. The key lies in ensuring arbitrator quality and process fairness.

Finally, comprehensive information concerning the quality of the arbitrators’ case management and decision-making skills, for the most part, is not readily accessible in a systematic and fair way to those seeking to hire them. It is easier to make an informed decision based on cumulative and qualitative data about a restaurant than an arbitrator! Considering the dollars spent and the importance of the matters, it is essential to remedy this problem.

Although confidentiality has been viewed as a fundamental arbitration benefit, a number of corporate counsel have recently challenged this assumption, and called for more process transparency, characterized by more robust information about arbitrators. When faced with the competing notions of confidentiality versus the ability to select arbitrators based on solid information, these clients placed more importance on the selection process.

Don’t Automatically Use Boiler Plate Arbitration Clauses

It’s a dull topic, but the real truth is that a huge percentage of the problems associated with arbitration are caused by poor clause drafting and failing to customize the procedure to actual business needs. Too often, the drafting is done at the last minute, by nonlitigation-savvy counsel or clients, and an off-the-shelf clause is plugged in without thought or analysis. This is a recipe for disaster. This is not a process or tribunal problem. It reflects a failure of the lawyers, both inside and outside counsel, to sufficiently analyze the issues at the outset of the relationship. There are more arbitration horror stories resulting from poor drafting than from any other single aspect of the process.

Typically, parties insert a clause calling for arbitration before the American Arbitration Association without any further consideration—often not even using the AAA’s suggested clause. Parties may not have read the applicable rules, and they don’t understand the implications. For example, in many standard clauses, a sole arbitrator may be selected who will decide arbitrability without rendering a reasoned award. Parties may be further shocked to learn that the filing fee can be a percentage of the claim, which could be significant in high-dollar cases. Often, the transaction’s clause drafter has never arbitrated or litigated and doesn’t appreciate the procedural or substantive issues raised by clause language choices. Surprisingly, even today, the clause often isn’t “drafted” at all, but rather is inserted from the previous deal.

In international transactions, parties tend to instinctively insert a clause calling for International Chamber of Commerce arbitration, completely oblivious to the fact that the first step in an ICC arbitration, after the lengthy arbitrator selection process, is setting out the “Terms of Reference,” which could easily take three months. While the ICC’s prestige and recognition remain alluring, parties for whom time is an issue need to consider whether a different process better suits their needs.

Even when parties draft customized clauses, there are traps for the unwary. A frequent issue arises when the clause provides for a “stepped process” that requires negotiation and mediation before arbitration but fails to add time triggers. Months can be spent wrangling over whether the conditions precedent are satisfied.

One way to ensure a speedier process is to craft reasonable but tight time limits at each stage. Some companies have adopted shortened time periods for whole classes or types of cases. In short, the surefire method for shortening the arbitral process is to spend more time during the deal by drafting the arbitration clause carefully, consistent with modern practice. For example, one drug manufacturer drafts with precision to maximize arbitration speed. Abbott Laboratories presses for a streamlined process by seeking tight time limits, requiring solo tribunals, and completely eliminating discovery—no depositions, document requests, or exchanges.3

Arbitration Can Reduce or Eliminate DiscoveryWars

Litigation discovery is usually an extremely negative experience, especially with the advent of electronic discovery. We spend huge amounts of money and end up using the same small set of documents and testimony that was evident in the first 30 days of internal investigation.

Arbitration offers an alternative, but only if clients take the lead. Counsel can regain control over the discovery process in arbitration either by using specific language in the arbitration clause that clearly defines discovery— including electronic discovery—or by adopting a set of arbitration rules that strictly limit discovery.

Many rules empower arbitrators to make decisions about discovery.4 Arbitrators are naturally loath to limit the parties if they have agreed to substantial discovery. Recently, working groups of the CPR Institute’s International Committee on Arbitration developed draft protocols providing best practices for arbitrators in directing witness testimony and discovery. For document discovery, the protocol provides several different models that can be selected by the parties as early as the drafting stage, starting with no discovery, to “discovery light” (preferred), to full-blown discovery (discouraged). Specific guidance is provided for electronic data. It is hoped that arbitrator reluctance to limit discovery can be overcome by such best practice standards.5

In international arbitration, parties and/or tribunals often adopt the International Bar Association Rules of Evidence, which provide for limited document requests in keeping with the expectation that there should be no “American-style” discovery. The IBA Rules have the added advantage of widespread international acceptance.

Ultimately, parties should appreciate that severely limiting discovery does not provide the same level of certainty of a “leaving no stone unturned” litigation approach. In-house counsel and, more important, their business clients need to appreciate that they must partner with their outside counsel in choosing what not to do. Plaintiffs’ lawyers are masters at finding out what is essential to the case early on and simply not doing the rest.

Defense counsel, who are understandably conditioned by their client experiences and their role as “zealous advocates,” are naturally conservative and can recommend more than absolutely necessary to win the case. It is incumbent on the business lawyer to pare the discovery back to the minimum. This exchange and partnering is perhaps the biggest key to keeping the cost and time of the arbitrated matter under control.

Stronger Case Management Is Essential

Arbitrators must play a major role in making the arbitral process more efficient. Corporate counsel increasingly complain that arbitrators fail to assert their authority and don’t limit or control the parties’ lawyers’ litigious instincts.

We highlight just a few examples of ways arbitrators can assert their control over the process to make it more efficient: bifurcate issues that determine the course of the full proceedings; eliminate discovery on the merits if the threshold issue is arbitrability or scope; and eliminate procedural motion practice entirely.

Most corporate counsel would like arbitrators to rule on dispositive motions especially when doing so would resolve the matter early in the process. There is a perception in the arbitration community that if the arbitrator grants a dispositive motion, instead of allowing the case to go to a full hearing, the award will be overturned in court. As long as granting a dispositive motion is an appropriate remedy in the context of the arbitration, however, the case law demonstrates that it will be upheld.6

Perhaps most significantly, at the outset, parties and the arbitrator should agree on streamlined procedures. Arbitration providers and rules generally allow agreement on shortening time limits. For example, JAMS and the ICC both provide for streamlined procedures in smaller cases or by party agreement.7

Finally, arbitrators should also support, and even encourage, mediation if it appears that another neutral third-party facilitator could help resolve the matter. Mediation and arbitration should not be viewed as competing processes, but as complementary ones. Converting arbitration to a mediation process raises caution flags for many, particularly if the arbitrator plans to shift to or from a mediator role. Nevertheless, for those neutrals and parties with the ability and experience to use it, “medarb” and other hybrid processes may be appropriate—even where the same neutral wears both hats.8

It is imperative that arbitrators aggressively do their part to ensure that arbitrations are quick and cost-efficient.

Addressing the Challenges

At the CPR Annual Meeting discussed at the outset of this article, the arbitration complaints sailed through keynote addresses, CLE seminars, coffee breaks, and cocktail hours. But before the meeting ended, there was an important acknowledgment in a concluding panel discussing class action arbitrations: “These processes aren’t going away, and they remain the most frequently used option for non-litigation, formalized dispute resolution.”

The growing business dissatisfaction with arbitration is a reality. Corporate department threats issued at the CPR meeting to reduce or eliminate arbitration may increase litigation, at least in the short term. But the tools and changes in processes are available to each of the parties, counsel, tribunals, and administrative authorities to make arbitration work. Each party must understand his or her own responsibility to improve the process and to have the will to change and adapt it.

The CPR Institute supports reform through a broad deployment of ADR processes to improve results and reduce litigation costs. Arbitration should remain an important alternative to litigation in the United States. CPR’s International Committee on Arbitration rules’ revision last year, including the deployment of a new interim relief process, as well as the draft protocols mentioned above, are recent moves to encourage best arbitration practices.

We believe the process can be effective. At the CPR meeting, attendees advanced the methods above to take back control of the processes in a way that will suit them—that is, their business, their clients, or the parties before them. Addressing the challenges of corporate drafting skills, discovery excesses, and the tribunal size and management style aren’t beyond the reach of practitioners. Nor should anyone feel that arbitration best practices have slipped away permanently.

Additional Tips on How to Streamline the Arbitration Process

Consider Appointing a Single Arbitrator

Single arbitrators are more efficient than a three-person tribunal. One well-qualified arbitrator may be appropriate and contribute to a less costly and more efficient procedure. For example, a single arbitrator need not consult with his colleagues as to whether a party can submit a brief a day late or whether a hearing can be moved an hour and can rule on discovery disputes on the spot. Alternatively, the parties may accomplish the same end by agreeing in advance to any or all of these issues, or by agreeing that a chair will make the decisions on his or her own.

Don’t Use Party Arbitrators

Parties often instinctively opt for a three-arbitrator panel, with two party-appointed arbitrators, because they feel most comfortable with choosing at least one of the decision makers. Parties then agree to a big-name chair because both sides consider him or her a safe choice.9 Now you are faced with coordinating the schedules of at least two clients, two sets of outside attorneys, and three arbitrators, any one of whom may be booked for months.

Partisan commercial arbitrations are less common today, but as recently as five years ago, arbitration hearings frequently featured wasted hours of partisan arbitrators asking questions, or making points intended as a show for the party that made the appointment. The interests of the process were not served by such grandstanding. Three neutral arbitrators are much less likely to waste time in this manner.

Submit Written Rather than Oral Testimony

Consideration should be given to submitting direct testimony in written form. U.S. lawyers often balk at procedures that do not allow them to present their witnesses first in a “friendly” posture. But the rote recital of facts that have been stated in claims and restated in prehearing submissions eats up more time and money than is warranted. This is especially true of background information. As an example, a simple resume can streamline significant billable time.

Consider an Ad Hoc Procedure

Rather than automatically using administrative bodies to oversee the arbitration process, parties should evaluate whether an ad hoc procedure can meet their needs. An ADR-savvy corporate litigation counsel recently explained that his company routinely uses non-administered procedures for all complex business disputes. He found the same quality level in the process and result, but at lower cost. Most important, the time to decision was much shorter. His experience was that the arbitrator was capable of performing most of the functions generally performed by the administering organizations.10

Eliminate a Reasoned Award

Parties generally demand reasoned decisions from their arbitrators. But writing, revising, and editing a decision may take weeks—or even months—when three neutrals must review the decision. Parties must weigh the benefits of a reasoned decision—for example, providing understanding and potential grounds for appeal—against the time and cost savings of a bare award, which in theory could be rendered the day the hearings are closed.


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Endnotes
1. FULBRIGHT & JAWORSKI, THIRD ANNUAL LITIGATION TRENDS SURVEY FINDINGS (2006) at 24–25; PROSKAUER ROSE, 2008 TRENDS AND DEVELOPMENTS IN INTERNATIONAL LEGAL PRACTICE at 6.
2. SIMFA, White Paper on Arbitration in the Securities Industry (Oct. 2007).
3. For more on Abbott’s strategy, see High-Quality Results, High- Quality Processes: Top In-House Counsel Discuss the Continuing Challenges in Commercial Arbitration, 24 ALTERNATIVES 182 (Dec. 2006).
4. See, e.g., CPR’s Arbitration Rules Rule 11 (2007 version); the AAA Commercial Rule 21 (Sept. 1, 2007, version).
5. Industry-specific rules may contain further limits on discovery. See, e.g., CPR Rules for Non-Administered Arbitration of Patent & Trade Secret Disputes (2005), Rule 11 (numerical and time limits); CPR Rules for Expedited Arbitration of Construction Disputes (2006), Rule 11 (numerical and time limits, and only exceptional e-discovery); AAA Construction Rules (2007) Rule 22 (limiting discovery).
6. For example, in Sherrock Brothers, Inc. v. DaimlerChrysler Motors Co., the Third U.S. Circuit Court of Appeals upheld a lower court’s decision that arbitrators are empowered to grant any relief reasonably
fitting the matter submitted, including summary judgment. In this case, the doctrines of res judicata, collateral estoppel, and waiver precluded Sherrock Brothers’ claims; therefore, an evidentiary hearing would be meaningless. (465 F. Supp. 2d 384 (2006).) On the other hand, in Prudential Securities, Inc. v. Dalton, 929 F. Supp. 1411, 1417 (1996), the U.S. District Court for the Northern District of Oklahoma found that the panel had “refus[ed] to hear evidence pertinent and material to the controversy and exceeded their powers in granting the motion to dismiss without hearing such evidence; Prudential was thereby denied fundamental fairness.” The court vacated an arbitration award and remanded the case to the arbitration panel.
7. See, JAMS’s Streamlined Arbitration Rules & Procedures (2007) and ICC’s Article 32(1), which “enables the parties to shorten time limits” provided in the ICC rules, and Article 32(2), which allows the ICC’s International Court of Arbitration to extend the shortened periods. See also TECHNIQUES FOR CONTROLLING TIME AND COSTS IN ARBITRATION: REPORT FROM THE ICC COMMISSION ON ARBITRATION, ICC Publication No. 843 (2007).
8. Note that CPR’s Arbitration Rule 19.2 prohibits a neutral’s conversion. See, e.g., Gerald F. Phillips, Back to Med-Arb: Survey Indicates Process Concerns Are Decreasing, 26 ALTERNATIVES 73 (April 2008).
9. CPR’s National Task Force for Diversity in ADR has acknowledged that most of the prominent arbitrators are white males and has called for more diversity in the selection process. See Diversity in ADR and at the AAA, DISP. RES. J. (American Arbitration Association, Feb.–Apr. 2008).
10. The assistance of a neutral third party may be needed to select the tribunal or decide a conflict of interest challenge to an arbitrator. With the two primary nonadministered procedures, the CPR Arbitration Rules and the UNCITRAL Rules, the appointing authority performs both these functions

By: Kathy A. Bryan and Helena Tavares Erikson

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