Contractual arbitration clauses are of the more common pitfalls of litigation. An arbitration clause is a written clause in a contract whereby the parties to the contract agree that in the event of a dispute, rather than sue in State or Federal court, the parties will litigate their case in a private arbitration forum before (usually) a private arbitrator. Buffington Law Firm’s trust, contract, and real estate litigation attorneys have litigated in arbitration many times. In this brief blog article, we will discuss some of the pros and cons of arbitration versus a trial in court.
Binding Nature of Arbitration Clauses. The first thing to know about contractual arbitration clauses is that they are pretty much impossible to get out of if one side is bound and determined to enforce the provision. While there are a few exceptions (which we will not discuss here) mainly in the context of employment contracts, in general the law is clear that the Federal Arbitration Act, which makes contractual arbitration clauses enforceable, preempts any state limitations on the right to arbitrate a dispute. The upshot is that in situations where there is an arbitration clause in a contract on which one side is suing, either side can almost always compel the dispute to be heard in accordance with the arbitration clause rather than as an ordinary state court lawsuit. Of course, if both sides agree that they will litigate the matter in state court, this may be done. But if either side demands arbitration the matter will generally proceed in arbitration rather than in court.
I. Advantages of Arbitration. The advantages of arbitration are generally held to be speed, possibly lower cost, a professional trier of fact, and finality.
A. Speed. It is no secret that the courts are overburdened with lawsuits in many states including California. When an action is sent to arbitration, it may actually go to the arbitration hearing (the equivalent of a trial) sooner than it would if it were in state court. In California it almost always takes at least a year for a matter to get to trial; sometimes much longer. A matter in arbitration may be heard much sooner.
B. Streamlined Procedures. Discovery disputes and certain types of pretrial matters may be resolved quicker and with less formality in arbitration than in state courts. This can be a big plus in some cases. In state or federal courts, discovery disputes can be formal, lengthy, and expensive. Most arbitrators handle such disputes in a much more streamlined fashion which may result in a speedier process that also entails lower attorney’s fees.
C. Professional Decision Maker. Except in certain specialized arbitration forums such as FINRA arbitration, most arbitrators are either retired judges or very experienced attorneys. Accordingly, it is usually the case that arbitrators understand complex legal and business disputes better than a jury is likely to. Sometimes an arbitration clause is written such that an arbitrator is chosen who is particularly knowledgeable about the type of dispute that is before him or her. Even the most ardent pro-jury attorney will usually admit that juries sometimes struggle with complex technical cases. In such a context an arbitrator who is knowledgeable as to the type of dispute in question may render a better decision.
D. Finality. There are only very limited grounds for appeal of an arbitration action. In a practical sense, it is usually about impossible to make a viable appeal of an arbitration decision. This means that the parties quickly reach finality in the dispute rather than having it drag on through a lengthy appellate process.
II. Disadvantages of Arbitration.
A. Waiver of Right to Jury Trial. Firstly, arbitration essentially waives the right to a jury trial. The right to a jury trial, where applicable, is an important and indeed a cherished civil right. It is a serious matter to be deprived of this right arbitrarily. While many or most arbitrators do their best, and do a fine job, there is a school of thought among lawyers that a jury trial is the fairest and most impartial means of determining the facts of a dispute. By agreeing to arbitration, the parties waive their right to a jury trial.
B. Expense. While arbitration may be more streamlined than a lawsuit in court, it is not always less expensive. The opposite is sometimes the case. The parties are responsible for paying the arbitrator, and this can be expensive. Arbitrators are usually very experienced individuals, with commensurate billing rates, often far higher than the party’s attorneys. If an arbitration case involves much in the way of pretrial disputes and motion practice, the arbitrator will be charging for his or her time, and matters can become quite expensive. By contrast, the taxpayers foot the bill for a Federal or State court judge, and jury panel fees are pretty nominal. Thus, it cannot be assumed that by sending a matter to arbitration that the cost of the dispute will be less than by simply going to court.
C. No Right of Appeal and What That Means. Except for very limited grounds, it is nearly impossible in a practical sense to appeal an arbitration decision. While this can bring finality, which may be a good thing, it also injects additional risk into an arbitration dispute. Arbitrators well know that their decisions cannot be appealed. This can potentially lead to an arbitrator making decisions or rulings that he or she would not make if the arbitrator had to take into account the potential for a meritorious appeal. Every trial lawyer knows that Federal and State court judges are acutely aware of the potential for appeal of their decisions. This tends to keep them honest and curb abusive rulings. This safeguard is not present in arbitration.
III. Some Final Thoughts.
A. Arbitration is a negotiated term of a contract — or should be. In our Firm’s opinion, the main problem with arbitration clauses is that often one or both parties are not even aware of the clause at the time they enter into the contract. Often the lawyer who drafts the contract inserts such a clause into the contract because that particular lawyer is litigation averse (most lawyers who draft contracts are not litigators) and thinks that somehow an arbitration clause will discourage, or at least soften the effects of, disputes or litigation. Many times when the parties enter into a contract the arbitration clause appears to them to be “boilerplate lawyerese” rather than a far-reaching provision deserving of careful consideration and possible rejection, just like any other proposed term of a contract. The law assumes that such clauses are freely negotiated between the parties, but in reality and practice this is often simply not so.
B. The Arbitration Forum is an important decision. Not all arbitration forums are equally good. In Southern California, it is common to find a contract that specifies the “American Arbitration Association” to be the required forum for the arbitration. Often the reader takes note of this authoritative sounding name and assumes that this selection was the product of careful thought, by an attorney wise in the ways of the law and so forth. In reality, at least in Southern California, the American Arbitration Association is not one of the better-equipped arbitration forums in our Firm’s opinion. Most of the arbitrators that they can supply are lawyers rather than retired judges, whereas most experienced trial attorneys tend to favor retired judges as arbitrators under the theory that they, after all, have the most experience in judging. Several other private arbitration providers have stronger arbitration panels of candidates than does the American Arbitration Association. Remember when negotiating a contract that the arbitration forum, as well as the decision whether to arbitrate at all, is a negotiated term that you do not have to agree to.
Hopefully this brief article has acquainted the reader with some of the “pros and cons” of arbitration versus an actual trial in Federal or State Court. If you have a trust, business, or real estate dispute, Buffington Law Firm’s team of experienced trial lawyers invites you to contact us for a Free Legal Consultation. All consultations are completely confidential and protected by attorney-client privilege and are with an actual experienced trial attorney.