A Case for Arbitration

A Case for Arbitration 
Arbitration clauses and the process of arbitration are not always what businesses expect them to be – private, speedy, and less expensive than litigation. A recent case involving firm attorney Fred Mendelsohn, however, demonstrated how in some circumstances, arbitration is the right tool for business disputes.

The case was essentially a wrongful termination with a number of ancillary claims brought by a terminated distributorship against a supplier, the most significant being a claim that the distributorship was actually a franchise under state law. If the franchise claim held up, the terminated distributor could have been entitled to protections from termination beyond those in the underlying Distribution Agreement, plus additional damages and attorneys’ fees. The initial amount sought in the arbitration was over $7 million, which was whittled down to roughly $2 million by the time of hearing. After a week-long arbitration trial and briefing, a three-member panel of arbitrators issued an award for the supplier (our client) – denying the distributor any relief and awarding the supplier roughly $500,000 for amounts due it for goods and loans. Here is why the arbitration process worked so well:

A Three Member Arbitration Panel: Some critics fault arbitration because arbitrators are often perceived to do simply what they believe is just, not simply following the law and/or possibly ignoring important facts. Some believe that this consequence flows from the fact that arbitrators do not have to follow the rules of evidence, and often can admit evidence that would never see the light of day in court. A three-member panel of arbitrators requires that a majority of the arbitrators concur in the ultimate decision, so that the risk of a no-win “compromise decision” is significantly reduced. Thus, although one arbitrator believed that the terminated distributor should have prevailed on certain issues, the majority sided with the supplier. The three-member panel was also required (as part of the underlying contract’s arbitration provision) to have knowledge of the underlying industry. The experienced panel of three arbitrators collectively maintained a strong governance of the process (e.g., tempering the admission of evidence that was considered seriously out of bounds by the supplier). The lesson: seriously consider requiring that more than one arbitrator, experienced in your industry, hear your dispute, and do so at the time of contract formation.

A Reasoned Award: Unless provided for in the original contract’s arbitration clause, arbitrators are not always required to issue written opinions or to otherwise explain their decisions, and awards sometimes seem to have emanated from a “black box.”  If an award is issued against you as a party in arbitration, it can be virtually impossible to successfully challenge it in court, leaving little recourse from a poorly reasoned or otherwise incorrect decision of an arbitrator.

In the foregoing example, the three-member panel of arbitrators agreed to provide the parties with a reasoned award – akin to a written judicial opinion. Thus, the parties received a clear-cut rationale for the finding against the terminated distributor, which makes an attack on appeal unlikely. The lesson: do what you can to obtain a reasoned award. While providing for a reasoned award in your contract’s arbitration provision is the surest way to secure a written award, the arbitration rules themselves may include such a provision, or the arbitration panel may prefer or agree to provide one.

Privacy: Proponents of arbitration often cite privacy as a significant benefit, as in the case example. The underlying case involved a great number of what the supplier believed were exaggerated, unsubstantiated claims, most of which were refuted by multiple testifying witnesses. In a small industry, word can travel fast, but not always accurately or completely. While public knowledge of a court ruling in favor of the supplier might initially sound desirable, the terminated distributor had no real case, recklessly sued the supplier and lost – and the supplier preferred that the misrepresentations stayed private. The lesson: privacy in dispute resolution has its advantages, and can be valuable – certainly worth your share of the cost of the arbitration panel and the process.

Costs and Speed: Critics of arbitration say that it is not the inexpensive, speedy dispute resolution procedure that its supporters claim, especially considering the costs to have arbitrator(s) hear a case for as long as a week, conduct all pre-hearing matters, consider the legal briefs and rule on motions filed by the parties. Nonetheless, these costs can still prove to be a bargain: cutting out almost all pre-trial discovery – particularly depositions and proceeding through a trial with live witnesses – can save arbitrating parties as much as $100,000 in trial expenses.

Further, a good arbitration panel can dispose of a case quickly. In our case example, the claim was filed, arbitrators selected, all pre-trial matters finished and an award issued in less than 18 months.  In court, the life of the case would likely have stretched to five years or longer. Lesson:  Even though its compressed schedule imposes significant costs and attorneys’ fees, the process of arbitration can still be more expedient and less expensive than a courtroom procedure.

No Discovery; No Big Deal: Arbitration critics suggest that the ability to (1) command and subpoena documents from third parties, (2) subpoena witnesses for trial and deposition testimony,  and (3) to preserve trial testimony by way of evidence depositions are valuable rights which are extremely limited in arbitration, and oftentimes cannot be enforced.  However, there is often more than ample evidence, particularly given arbitration’s relaxed rules of evidence, for each side to present sufficient evidence of their respective cases. While parties to an arbitration agreement can agree to limit or expand each other’s discovery rights (such as specifying the deposition of no more than three party agents, for example), the absence of such rights in the case example did not prejudice either party – and certainly cut down on the time to obtain a verdict. Here again, the lesson is that a well-managed arbitration can make a great deal of business sense.

Arbitration is often the better option for resolving disputes, despite its critics. The right mixture of ingredients – a three member panel experienced in the relevant industry, a reasoned award, and seasoned arbitrators who can manage and effectively control the process and deliver a verdict in relatively short order – can overcome most significant reservations for businesses with an arbitration provision mandating arbitration for dispute resolution between business partners.

If interested in discussing arbitration issues generally or this article, please contact Fred Mendelsohn at (312-840-7004) or (fmendelsohn@burkelaw.com).