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Arbitration – Best to Think Twice

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Arbitration is touted as faster and cheaper than the court system.  However, there are no guarantees that this is the case and, more often than not, arbitration is not faster and is exponentially more expensive.  There are several reasons for this:

  • Most arbitration companies charge a large upfront fee based on the amount in controversy just for the administration of the case.  The fee has nothing to do with the complexity of the case or the amount of effort required for case administration.
  • Private arbitration companies charge a high hourly rate for their arbitrator’s time on top of the administration fee. 
  • Most arbitrators will allow discovery, so the myth you can save on discovery costs rarely holds true.
  • Arbitrators are often reluctant to exclude evidence or cut off a case presentation, which results in lengthy hearings, which of course are more expensive in terms of both attorney and arbitrator time.  

In one recent case, the case fee for the arbitrator alone was $18,000 per party for a two-day arbitration, which involved document and witness disclosure only and no additional prehearing discovery.  This case involved one arbitrator; these fees would have been double or triple if the arbitration agreement specified more than one arbitrator, as many do.  One attorney recently reviewed hundreds of clients’ arbitrations before one commercial arbitration company, and concluded that overall arbitration costs over $100,000 more than trying the same cases in federal court.

In addition to the expense, one of the largest concerns with arbitration is there is absolutely nothing requiring arbitrators to take the law and legal precedent into account in making their decisions.  Although they are supposed to follow the law, most arbitration awards are not appealable except under very limited circumstances.  There are no public records of the arbitration, no transcripts and no requirement for arbitrators to submit a written opinion.  Even with these procedural safeguards in place, without meaningful appellate review there is no incentive for arbitrators to follow the law.  Given the general informality of arbitration proceedings, arbitrators often view their job as to determine what is “right” or “fair” rather than what the law requires.  Similarly, arbitrators are not compelled to follow any particular procedure or make sure both parties receive a full and fair opportunity to have their case heard. 

To avoid these issues, we recommend that clients review all their form agreements.  Many agreements currently providing for arbitration contain arbitration clauses which were drafted with the presumption that arbitration would be a fast and inexpensive form of dispute resolution.  These provisions should be revisited to be sure they still make sense and that arbitration is in fact the preferred method of dispute resolution.  If arbitration does makes sense, one can avoid some of the problems of arbitration by drafting a detailed and narrow arbitration clause specifying a forum, discovery limitations, deadline for completion of the dispute resolution process, and appeal rights.

Our litigators are experienced in arbitration and can assist in reviewing arbitration agreements or discuss the particular risks and potential merits of arbitration further.