The increasing delays and expense inherent in court litigation have caused more and more parties to consider arbitration as an alternative.
What is arbitration? It is the submission of a dispute or controversy to third parties (called arbitrators) for decision according to agreed upon rules and procedures that hopefully will avoid the time and cost eaten up in court litigation.
Who are arbitrators? The parties to a dispute can agree that it will be decided by anyone. Usually, however, they pick persons they both trust or persons with experience in resolving or dealing with similar disputes. There are organizations that maintain panels of experienced arbitrators. For example, the American Arbitration Association has experienced attorneys, accountants and business managers on its panel of arbitrators.
When can the parties to a dispute agree to arbitrate? The parties can submit an actual dispute which already exists to arbitration if they both agree to do so. The parties can also agree in writing in advance that particular types of anticipated disputes (such as disputes which may arise from a particular agreement or project) will be submitted to arbitration. Such agreements will be enforced even if one of the parties changes his or her mind later.
Such arbitration clauses typically appear in many form, preprinted contracts such as construction contracts, agreements signed by customers at securities brokerage houses, agreements for the purchase of real property and the like. They usually do not appear in agreements where alternative swift and uncostly relief is available (such as leases where landlords want to preserve their right to sue in unlawful detainer rather than arbitrate, and deeds of trust where lenders want to preserve their right to foreclose rather than arbitrate). However, they often appear in construction contracts, real property purchase and sale agreements, securities brokerage customer agreements and partnership agreements. Look out for such clauses, especially in pre-printed agreements, and discuss them with your attorneys. They may even be incorporated by reference. You do not have to accept them and they may or may not be advantageous to you.
What points should be covered in a typical arbitration clause? An arbitration clause should describe the types of disputes or anticipated disputes that the parties agree will be submitted to arbitration. For example, the clause could be drafted broadly to include all types of disputes relating to the interpretation or performance of a particular agreement between the parties or arising from a particular transaction or project in which the parties are involved, or the clause could be limited to specific, particular kinds of such disputes. Exceptions should be spelled out. For example, even broad arbitration clauses sometimes include an exception for small cases that fall within the jurisdiction of the small claims court.
An arbitration clause should spell out if the arbitrator has power to determine whether a case is arbitrable (i.e. whether it falls within the types of disputes covered by the arbitration clause) in the event the parties disagree.
An arbitration clause might specifically acknowledge or limit the authority of the arbitrator to award particular types of relief, such as attorney’s fees, punitive damages, declaratory relief and the like. It might also provide that the parties may, concurrently with the arbitration, maintain a companion court suit so that the status quo between the parties may be maintained until a decision is reached in the arbitration.
An arbitration clause should also address the procedures and rules to be followed in selecting arbitrators, presenting evidence and deciding the case. Normally, however, an arbitration provision will simply incorporate by reference procedural rules and guidelines already established by a particular body that is involved in arbitrating disputes. For example, the American Arbitration Association has a body of rules for general arbitrations and also separate specific bodies of rules governing particular types of arbitrations (such as construction disputes and commercial disputes). These rules may be incorporated by reference into an arbitration clause.
There are many ramifications to the arbitration decision. In addition to the above drafting considerations, some statutes in California provide that arbitration clauses in particular types of transactions must contain certain language or be set forth in special bold print. You should consult with an attorney before entering into an agreement containing an arbitration clause.
What are the advantages and disadvantages of arbitration v. court litigation? Arbitration is almost always cheaper and faster than court litigation. Strict rules of evidence do not apply. Anything relevant that might help get to the truth and resolve the dispute may be considered by an arbitrator (even hearsay and other evidence normally not admissible in court). Sometimes evidence may be submitted by declaration rather than having a witness actually come in and testify. Expensive discovery procedures (such as depositions, interrogatories and the like) are normally not permitted in arbitrations (although, if material information in the other parties’ possession is needed for your case, the arbitrator may order its production).
There are disadvantages, however. Arbitration is normally binding when the parties agree to it (although court ordered arbitrations are non-binding). There is no right to appeal the decision of the arbitrator. There is no jury. The case is decided by one or more experienced arbitrators (depending on the rules adopted in the arbitration clause). The arbitrators may have ties and contacts in the industry or field in which the dispute is set. Although they have the power to do so, arbitrators normally do not award punitive damages and typically their awards are less than jury verdicts in comparable cases.
On the whole, arbitration is a good way to resolve disputes and it will save you time and money. You should seriously consider it in connection with actual and anticipated disputes.
About the author: Mr. Dzida is a partner in the law firm of Callanan, Rogers & Dzida,LLP, who specializes in business and real estate litigation. He has also been a member of the American Arbitration Association panel of arbitrators for many years.