Arbitrators

Suppose you’re doing business in a country that is perceived as being corrupt. For example, Myanmar, North Korea, and Somalia take the bottom three slots in the 2010 Corruption Perceptions Index.

Okay, let me rephrase that: Suppose you’re doing business in a country where it’s actually lawful to do business, but the country is perceived as being corrupt. Cambodia or Zimbabwe might fit the bill. (On reflection, it strikes me that my own company may actually do business in those two places. If we do, then I, naturally, love the judicial systems in Cambodia and Zimbabwe. If my company is ever in court in one of those places, please don’t hold this column against us. It’s just that terribly unfair perception of corruption that gives you guys a bad name.)

How do you conduct business there?

Very carefully, of course.

As a matter of compliance, your company must implement policies that forbid payments that are customary in the corrupt place, but forbidden by U.S. law. And your company must enforce those policies, perhaps by having a regional group that approves third parties with whom you do business or otherwise strives to comply with the law.

But that’s the front end. What do you do at the back end, if you find yourself in a dispute in the corrupt place?

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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.

Or that was what the pundits said….

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