To arbitrate or not to arbitrate
Practical tips on business arbitration
By Charles H. Resnick
Yes, it was discussed in the original contract. But if and when the dispute
comes to arbitration, are you ready?
This article is intended to help the reader — who has litigated in
the courts — understand and make the most of the differences between
arbitration and litigation.
Arbitration is a consensual process created by contract. While parties
commonly incorporate by reference the rules of administrative bodies such as
American Arbitration Association, National Association of Securities Dealers
and the National Arbitration Forum, contracts sometimes provide tailor-made
rules that must govern. This article assumes that the more common rules of
administering agencies will apply.
Arbitrator selection is an opportunity. Do not waste it. The most important
thing you will do in the arbitration proceeding is to select the arbitrator
or arbitrators. You will spend a lot of time preparing, presenting and
arguing your case. This effort will be more useful if you are trying the case
to a panel who will understand and be likely to be persuaded by your
evidence.
Selection methods will vary depending on the contract language or the
administrative forum, but there is nearly always greater opportunity to
determine how a prospective arbitrator is likely to react to your case than
there is when trying to a judge and jury. If you would do an extensive voir
dire of prospective jurors, keep in mind that the arbitrator is the jury. If
you would try to have your case heard by a judge who would hopefully lean
your way, remember that the arbitrator is also the judge.
The most commonly used selection process is that of the American Arbitration
Association, the oldest and most widely used arbitration administration
tribunal. After filing of the demand for arbitration, AAA staff selects from
the roster of arbitrators approximately 15 who have the background and
experience suitable for the issues in dispute.
Persons with obvious conflicts are excluded in the process although
occasionally a panelist will disclose, after selection, a disqualifying
problem that was not apparent from his or her resume. The AAA list is
accompanied by a short resume of each potential arbitrator. The resume will
provide biographical information such as age, education and business or
professional experience of the candidate.
Each party is permitted to strike from the list any (or all) of the
candidates who are unacceptable. In effect the party has an unlimited number
of peremptory challenges.
You may assume that any arbitrator on the AAA panel will recuse himself or
herself if the arbitrator is aware of a conflict of interest. You may also
assume that an arbitrator who has some relationship with either party or with
the parties' counsel, or with one of the witnesses, which the arbitrator does
not deem to be a conflict, will nonetheless disclose the relationship. AAA
training — now mandatory for all AAA panelists — lays heavy
stress on assuring that there is no bias or partiality resulting from
undisclosed relationships.
Other tribunals — such as the New York Stock Exchange and National
Association of Securities Dealers — do similar training and also
scrupulously require disclosure of possible conflicts. NASD has moved from
staff selection of arbitrators to a list-selection process much like that of
AAA. NYSE, while retaining staff selection, offers list selection when agreed
to by the parties.
There remain the predispositions that each of us develops over a lifetime.
Some people are generous; some are stingy. Some people are strict
constructionists; some are prone to take a broader view of the written word.
The resume will not show these traits of character. Neither will it show that
a relatively young person is showing the initial symptoms of Alzheimer's or
that a chronologically old person is mentally as sharp as a tack.
In an important case, involving large sums of money, counsel needs to use all
available resources to learn as much as possible about such predispositions
and possible infirmities. One might inquire of present or past associates or
colleagues of the potential arbitrator. One might seek published works of the
potential arbitrator. One may inquire of counsel who have presented other
cases to the same arbitrator.
Finally, although one should do so only jointly with opposing counsel, there
is no reason not to interview those of the potential arbitrators who appear
to be good choices. In effect, counsel for each of the parties would have the
equivalent of a jury voir dire. No one would hire a new associate or a
paralegal based solely on a resume. Those candidates will be interviewed and
references checked. Be equally prudent in choosing your arbitrators.
In rare instances, none of the panelists on the list will be acceptable.
Should this occur, strike all of those shown and ask for a new list. It is
more important to present your case to a desirable panel than to expedite the
selection process.
In larger cases, unless the parties agree otherwise, issues are nearly always
decided by a panel of three. Counsel may take some comfort in the notion that
if one of the panel goes off the deep end, the other two will still render a
sound award. Mitigating against this plus for a panel of three is the fact
that the proceeding will be more expensive and slower than with one.
Scheduling and the length of the hearing day are necessarily three times as
complex for a panel of three as for one.
The arbitration agreement may specify the number of arbitrators or the AAA
according to Rule R-17 may specify the number, but the parties may always
mutually agree to a greater or lesser number. Whether you have one neutral
arbitrator or three, make your selections only after the careful inquiry
suggested above.
Select only highly credible party-appointed panelists. Although the practice
is discouraged by the AAA, arbitration clauses sometimes provide that each
party shall appoint an arbitrator and that the two so chosen shall select a
third. Although a party-appointed arbitrator is permitted and expected to
have a bias in favor of the appointing party (AAA Canon of Ethics VII), do
not make the mistake of appointing your law partner or your relative on the
theory that he or she will be your advocate in the deliberations. If the
party-appointed arbitrator behaves like an advocate, the jointly selected
neutral will tune that person out and disregard his or her comments. You are
the advocate.
What your appointee brings to the proceeding is the ability to highlight
evidence or call attention to helpful law during deliberations. To be
persuasive with the neutral, your appointee must be totally credible.
Thus your choice should be of a person of stature and integrity. He or she
should be ready to concede issues that no impartial arbitrator would decide
in your favor.
There is no restriction prohibiting you from talking ex parte to prospective
party appointees and explaining your position as well as that of your
opponent. A sensible question to ask is: "If you heard only what I have
just told you, how would you vote to decide the case?" If you don't like
the answer, find someone else.
Neither is there any restriction on discussing potential neutrals with your
appointee. You may have more information on the proclivities of some
candidates than does your party-appointee. Do not delegate this all-important
decision in its entirety. After the joint selection, most panels will agree
that all three will be "neutral" in that no ex parte communications
to any of the panel will be permitted. (AAA Rule R-20(b)) This is in your
interest. You want the panelists to discuss the case freely as it progresses
and they will be unable to do so if the party-appointees are pipelines to
their respective sides.
Dispositive motions will seldom be granted. If you have a case that you feel
confident can be won on a motion to dismiss or a motion for summary judgment,
it is worth a try. The motion for summary judgment may be more aptly named a
motion for summary award. However, such motions are very much a long shot.
The typical arbitrator will feel that the parties have agreed to resolve
their dispute by arbitration and he or she will be reluctant to turn either
party away without a hearing. You may improve your chances if you have
selected as arbitrator a retired judge with a reputation, while on the bench,
for granting such motions.
Theoretically, a panel will rule on all motions and objections to evidence,
acting by majority rule. In practice, in order to keep the case moving
without frequent recesses, panelists often delegate to one of their number
(usually the chair) the power to rule on motions and objections. When that
member deems it necessary, he or she confers with fellow panelists before
ruling. Counsel should not hesitate, if a single member rules adversely on a
motion or objection of importance, to request that the full panel consider or
reconsider the issue.
The rules of most arbitration administrators call for a pre-hearing
conference soon after the case is at issue. This is an opportunity for the
parties and the arbitrators to agree on a schedule for discovery, briefing
and hearings. It is also an opportunity to resolve a number of the mechanical
matters (such as, stenographic transcript, number of copies and distribution
of exhibits, length of briefs, duration of hearing day). The chair usually
has been selected by the time of the pre-hearing conference and presides at
it with due deference and consideration for the co-panelists and for the
parties and counsel.
Do not plan on court-style discovery. Counsel should be prepared for the fact
that, while complete production of documents is the norm in arbitration,
discovery depositions are not. Section 7 of the Uniform Arbitration Act
(adopted by 49 states, some with amendments) provides only for depositions
"for use as evidence."
While arbitrators are empowered to order discovery depositions, many are
loath to do so since part of the advantage of arbitration is the reduced cost
and delay resulting from the elimination of extensive discovery. (See AAA
Rule R-23.) Arbitrators will, however, allow a program of discovery including
depositions, if mutually agreed by the parties. (For a more extensive
discussion of discovery in arbitration, see Sean Carnathan's article in 10
BLT 4, March/April 2001.)
Keep your briefs simple. Briefs are normally welcome and should be prepared
in much the same style as for a bench trial. Keep in mind that some of the
panel may not be lawyers. If one or more lack legal training, the brief
should be less reliant on precedent and more directed to the equities of the
case.
Produce live witnesses. Although affidavits are admitted in arbitration (AAA
Rule R-34), live witnesses are almost always to be preferred. One arbitrator
likes to say: "I want to see the witness sweat." The witness may
convey credibility and conviction in a manner that the affidavit will not.
The live witness will also be able to answer questions the panel may have and
set concerns to rest.
In some cases, counsel by agreement provide opposing counsel with an
affidavit from witnesses in order that they be able to prepare cross-
examination. Do not rely on the affidavit as a substitute for direct
examination. The witness will almost always be more impressive in
person.
Some arbitrators may admit unsworn declarations "for what it is
worth." The offeror must assume that little weight will be given such
documents except in unusual circumstances.
You are unlikely to win an appeal of an adverse award. Section 10 of the
Federal Arbitration Act and Section 12 of the Uniform Act provide that a
court may vacate an award procured by corruption, fraud or other misbehavior
or misconduct of the arbitrators. In practice, this is very hard to show and
few awards are vacated by the courts. On the contrary, a series of U.S.
Supreme Court cases have confirmed awards and provided support for
arbitration and deference to the panelists.
It is clear that the courts will be reluctant to set aside an award entered
after hearings. See, for example, Circuit City Stores Inc. v.
Adams1215 S. Ct. 1302 (2001); Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth Inc. 473 U. S. 614 (1985). However, if one of the
parties files a bankruptcy petition, the automatic stay provision of the
Bankruptcy Act will apply and the proceeding will be halted unless the
bankruptcy court grants leave to proceed.
You may not want a reasoned award. The arbitrator is not required to render a
reasoned award unless the parties request it prior to appointment of the
arbitrator. Frequently the parties care only about the bottom line and the
award is simply a finding for claimant or respondent with award of damages
and costs. Sometimes counsel wants a reasoned award so that if he or she
loses, the client will understand why.
However, the prevailing party may be better off with a "bottom
line" award since it is less likely to be successfully appealed. Even
though there are severely limited rights to contest an arbitration award,
your chances of having a problem are higher if the arbitrator grants an award
that has obviously confused the law. While even a wrong decision on the law
is not technically grounds to contest an award (unless the parties have
agreed otherwise), courts may have difficulty following that rule in the face
of an obviously wrong award.
You may recover costs or attorneys fees — sometimes. The arbitrators
have wide discretion to apportion costs, including their own fees. (See AAA
Rules R-45, 51,52 and 53.) The rules make no provision for imposing attorneys
fees on the loser, and, as is true in American courts, attorneys fees are not
normally imposed in the absence of statutory authority or specific agreement
of the parties. If attorneys fees are imposed, a separate hearing may be
required to determine the amount deemed reasonable.
Do not be misled by informality; you are playing for keeps. Some arbitrators
are quite informal. None wear black robes. Some come to the hearing in
"dress down" attire. Some invite counsel to call them by first name
or nickname. Some will have a cup of coffee while listening to the evidence.
This does not mean that the proceeding is being taken lightly.
Arbitration is a serious process designed to resolve the dispute. Present
your case as solidly as possible. Avoid redundant evidence that the panel
makes it clear it prefers not to hear, but leave no holes. Contrary to the
tired shibboleth that arbitrators tend to cut the baby in half, this
arbitrator's experience is that more often than not the winner takes
all.
Arbitration is a desirable alternative to resolving disputes through
litigation in the courts. Counsel must be aware of the differences in the two
procedures in order to optimize the result for a client.
Resnick is a full time arbitrator and mediator with offices in Lexington,
Mass. He was formerly general counsel of Raytheon Co. His e-mail is
chradrlex@hotmail.com.
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