Federal Judges, In-House Counsel, Litigators, State Judges

Inside Straight: On Choosing To Arbitrate

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I came of age in the law in the late 1980s. At the time, arbitration was viewed as a big deal and a possible threat to the judicial system. Many corporations were adding arbitration clauses to their contracts; companies were agreeing to arbitrate, rather than litigate, disputes; and pundits feared that the judicial system would suffer.

What were the perceived benefits of arbitration?

It’s private. Companies wouldn’t have to share their dirty corporate laundry with the world.

You get to pick your own decision-maker. If you fear generalist judges, you can select an industry specialist as your arbitrator.

Arbitration is cheaper. Limited (or no) document production; no depositions; no silly, time-consuming motion practice. No serious appellate review, and thus relatively few time-consuming appeals.

This was perceived as being not just good, but great! Parties could design their own processes to have private judges resolve disputes quickly and efficiently, and corporations would spare themselves the expense and indignity of appearing in court.

Indeed, a couple of decades ago pundits feared that arbitration would soon threaten the judicial system. Parties with means would plainly prefer arbitration to litigation, so there would be ample demand for arbitrators’ services. Arbitrators are often paid at the rate of private practice lawyers, rather than public servants, so good judges would leave the bench in droves to accept more lucrative jobs as private arbitrators. The quality of judges would decline, and America would be left with a two-tiered system of justice: High-quality, private arbitration for the rich, and low-quality, public courts for the poor.

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Or that was what the pundits said….

Folks who are involved with international arbitrations seem generally to like that process (or see no decent alternative). Folks involved with specialized arbitrators in exotic niches generally seem to like that process. But for run-of-the-mill commercial disputes, there seem to be as many people opposed to arbitration as there are in favor.

Why?

First, many folks note that the nature of arbitration has evolved over time. Arbitrations were originally meant to involve limited discovery. But lawyers involved with arbitrations resisted those limits. (How, the lawyers would ask, can you possibly cross-examine a witness without having first deposed the person?) The arbitrators themselves were often lawyers, so they understood the supposed need for discovery and found the authority to permit it. Many critics of arbitration now say that a commerical arbitration can involve just as much discovery, with its associated costs and delay, as a litigated dispute.

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Second, critics say, the absence of a full-blown right of appeal is dangerous. Arbitrators are human and naturally make mistakes, and appeals can fix those errors. Without full-blown appeals, errors go uncorrected. But, beyond that, decision-makers act differently when they know that their decisions aren’t subject to a close second look. Arbitrators may feel more comfortable doing justice instead of applying the law, and the absence of traditional appellate remedies may give the arbitrators comfort to do so. That tendency can render governing principles more flexible, making results harder to predict in advance.

Third, critics say, arbitrators are more prone than judges to enter compromise awards. Federal judges are appointed for life; they know that they’ll be fully employed no matter how they rule in any particular case. Arbitrators are retained by private parties. If an arbitrator takes a hard stance, by making a large award to a plaintiff or letting a defendant off completely, that stance may come back to hurt the arbitrator economically. One of the parties (and the lawyers for the party) to the particular arbitration may be outraged, so those folks may choose not to hire the arbitrator again in the future. The unhappy folks may spread the word that this particular arbitrator is “dangerous,” thus hurting the arbitrator’s business generally. In that environment, arbitrators are not crazy to act moderately. That has advantages and disadvantages, but arbitrators’ supposed tendency to make compromise awards may outrage people who hope to win a case entirely, rather than to see the baby split.

My personal sense is that arbitration today has as many critics as it does proponents. I rarely see the literature on this subject any more, but I suspect that pundits have less fear now than they did a couple of decades ago that America is heading to a two-tiered system of justice. From a practical perspective, lawyers who are drafting contracts, or considering using arbitration to resolve a dispute that would otherwise be heading to court, should think carefully about the relative merits of these different ways to resolve disputes.

Mark Herrmann is the Vice President and Chief Counsel – Litigation at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law (affiliate link). You can reach him by email at inhouse@abovethelaw.com.

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