Over the last ten years, the use of binding arbitration to resolve disputes has greatly increased. Although arbitration is similar to a court proceeding and the hearing is similar to a non-jury trial, there are significant differences. The following chart illustrates the differences in litigation and arbitration:
|
LITIGATION |
ARBITRATION |
|
| Public | Private | |
| One party initiates | Parties must agree on use | |
| Proscribed rules of procedure | Flexible procedure agreed to by the parties | |
| Broad discovery | Limited discovery depending on arbitration rules agreed to by the parties. | |
| Generalist judge or jury makes decision | Arbitrator(s) with special expertise in the subject matter make(s) decision | |
| Law and precedent govern decision | Party selected standards govern awards (e.g. right and just or other agreed to standard) | |
| Broad right of appeal | Final and binding with limited grounds to vacate award absent a different agreement of parties | |
| Full remedies available | Parties can limit arbitrator’s authority to award certain remedies and damages | |
| Regular litigation costs generally more expensive than arbitration | Designed to be more cost effective than litigation | |
| Delays regularly associated with litigation | Hearings start quicker; delay depends on elected arbitration rules, arbitrator’s schedules and management skills | |
| Summary disposition (motion to dismiss and summary judgment) is allowed | Unless otherwise agreed, no rules for summary disposition. | |
Arbitration is designed to be faster, cheaper, quicker and more informal than litigation. There are many benefits to using arbitration rather than litigation. However, there are tradeoffs that should be recognized and appreciated before automatically agreeing to arbitration.
Additional Costs. First there are fees and expenses associated with arbitration that are not incurred in litigation. In a complex dispute the fees and expenses can be significant. If the case is administrated by an agency, such as the American Arbitration Association, filing fees based on the amount in dispute are charged for administrating the case and for the hearing room. Typically the largest cost is the professional fees of the arbitrator. A three arbitrator panel generally decides complex business disputes. Each arbitrator charges an hourly rate for preparing for hearings, participating in the hearing and for studying and writing time in preparing the reward and for travel expenses. These fees and expenses can accumulate rapidly and would not be incurred in litigation since there is no charge for the judge, the administration of the case and use of the court room.
Limited Discovery. Unless the parties agree, there is little discovery in arbitration. Depositions, if agreed to, are limited. Interrogatories are generally inappropriate. Typically the parties exchange relevant documents and the identity of potential witnesses.[2] If the case is governed by rules that are applicable to large complex cases, broader discovery (including depositions of individuals having information the arbitrator deems necessary) can be ordered upon good cause shown at the discretion of the arbitrator.[3] The limitation on discovery is one of the factors that make getting to hearing in arbitration faster than in litigation. Having limited discovery also reduces the costs in arbitration when compared to litigation. In a complicated case, however, the lawyers have a tendency to agree to as much discovery as in litigation and accordingly the much of the costs and time savings as compared to costs of litigation is lost.
Relaxed Rules of Evidence. In the typical arbitration, the arbitrator is not required to follow the rules of evidence used in trial.[4] Hearsay may be allowed. The arbitrator has wide discretion to determine what evidence is relevant and often admits evidence that would not be admissible during a trial. Arbitrators may also allow testimony in the form of affidavits.[5] Most arbitrators will allow evidence into the record mindful that one of the limited statutory grounds of appeal is the arbitrator’s failure to refusal to admit relevant evidence or to hear material testimony.[6]
Equitable versus Legal Decision. One of the principle tenets of arbitration is that the parties should be allowed a full and fair hearing to present its case.[7] There are no procedures in the Federal Arbitration Act, the Texas Arbitration Act, the AAA’s Commercial Arbitration Rules or the Supplementary Procedures for Securities Arbitration that allow for summary judgments.[8] Accordingly, arbitrators are reluctant to grant summary relief. Further, unless it is otherwise agreed an arbitrator is authorized to grant any remedy or relief that the arbitrator “deems just and equitable and within the scope of the agreement of the parties.”[9] Texas case law also supports the arbitrator’s ability to craft an appropriate remedy.[10] Remedies and relief unavailable in litigation are available in arbitration.[11]
Limited Grounds to Appeal. Another important distinction between trial and arbitration is that an appeal of the arbitrator’s decision, the award, is limited. By agreeing to arbitration, a party gives up its right to appeal in exchange for finality.[12]Arbitrators decide the facts and the law and their decision is not subject to review for being incorrect.[13] An award can be vacated only for a few statutory grounds[14] and a common law concept of “conscious disregard of the law.”[15] A court are reluctant to vacate an award and will only do so if there is clear violation of the statutory ground or if the arbitrator clearly identifies the applicable law and then willfully ignores it.[16]
Generally, arbitration is an effective process for resolving business disputes faster and with less cost that litigation. Yet, parties and counsel should be fully aware of the differences between arbitration and litigation. They should also be mindful that in a complex case with agreed full discovery, an arbitration could be as, or more, expensive, than litigation, and subject to the same delays.
[1] Center for Prevention and Resolution of Disputes website.
[2] AAA Commercial Rule 21.
[3] AAA Commercial Rule L-3 and L-4.
[4] AAA Commercial Rule 31.
[5] AAA Commercial Rule 32.
[6]Federal Arbitration Act, 9 U.S.C. §10(a)(1); TEX. Civ. Prac. & Rem. §171.088(a)(3)(C).
[7] Prestige Ford v. Ford Dealer Computer Services, Inc., 324 F3rd 391 (5th Cir. 2003).
[8]Federal Arbitration Act, 9 U.S.C. §1, et. seq.; Tex. Civ. Prac. & Rem. §171.088(a)(3)(C); AAA Commercial Arbitration Rules.
[9] AAA Commercial Rule 43.
[10]Crow v. Wellness International Network, 2002 WL 1917664 (Tex.App.—Dallas, 2002); Daniewicz v. Thermo Instrument Systems, Inc., 992 SW2d 713 (Tex.App.-Austin, 1999, pet. denied).
[11] Under AAA Commercial Rule 43(a), the arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties.
[12] Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968).
[13] Todd Shipyards Corp. v. Cunard Lines, Ltd., 943 F2d 1056, 1060 (9th Cir. 1991).
[14] Federal Arbitration Act, 9 U.S.C. §10(a); TEX. Civ. Prac. & Rem. §171.088(a).
[15]Wilko v. Swan, 346 U.S. 427 (1953);Prestige Ford v. Ford Dealership Computer Services, Inc., 324 F.3d 391 (5th Cir. 2003)
[16]Stark v. Sandberg, Phoenix Von Gontard, 381 F2 793 (8th Cir. 2004).