To Arbitrate Or Not To Arbitrate? These Days, That’s Usually The Question.

12.2.13

Arbitration is a process whereby two parties in a dispute agree to be bound by a neutral third-party’s resolution of the disagreement.  Arbitration, for the most part, is a cheaper and faster solution than going to court, but some of the protections provided by the litigation process are lost.

Sometimes, arbitration is forced upon businesses due to mandatory provisions in labor or vendor agreements.   Other times, with no mandate for dispute resolution, taking an argument to court may be the most effective and efficient route.  Yet in many circumstances, choosing to arbitrate is the fastest and most inexpensive solution to resolve thorny issues.  Anticipating these scenarios, and dictating the rules of arbitration beforehand, is often the best way to ensure a favorable resolution.  

This article discusses some of the key decisions businesses must make when setting the parameters for arbitration.  At the forefront of these decisions is selecting which matters are best for arbitration and which are not, and this article lays out what factors you should consider when making this decision.   Then, once you’ve elected for arbitration, this article lays out three provisions you should consider including in your arbitration clauses. 

When to Arbitrate?

Including a mandatory arbitration clause in a contract is sometimes the best way to shift the balance of future disputes in your favor.  One such scenario is when preparing for a dispute between two well-financed parties; litigation between deep-pocketed litigants can drag on for years, compounded by motions and expensive discovery.  Arbitration, on the other hand, can provide a faster, less expensive route that doesn’t consume a party’s time, attention, and finances.  And, if a potential opposing party has even deeper pockets than you, arbitration can level the playing field, allowing smaller companies to protect contractual rights without feeling the pressure to settle.  Conversely, if you are the party with greater leverage, litigation might be a better way of exerting control over a dispute.  

Also part of the deliberations on deciding whether to include an arbitration clause is the impact of discovery.  Arbitration typically provides for information sharing before a hearing that is much less extensive than litigation, especially in California.  If you have sensitive information you want to keep away from outside eyes, arbitration might be the way to go, whereas if you need access to the other party’s information and witnesses, you may want to litigate. 

Finally, how important is the outcome of any anticipated dispute?  As good as arbitration and arbitrators may be, sometimes they get things wrong, and appealing from arbitration is often very difficult.  In fact, courts usually deny appeals from arbitration decisions absent very unique circumstances.  As such, if you are in a “bet the company” situation, putting your fate in the hands of an arbitrator without the chance for appeal may not be the best choice.  

What to include in arbitration clauses?

Once you’ve decided that including an arbitration clause is the way to go, there are several provisions you may or may not want to include.  Here we discuss three of those provisions:

Judicial Reference Clause 

In California, parties can agree to have disputes decided by "judicial reference." There are two kinds of judicial reference, general and special. In a general reference, the referee decides the whole case, whereas in a special reference the judge delegates certain issues to a "special master," to resolve things like discovery disputes, settlements, or complicated damage calculations.  Under general reference, a privately selected judge may decide all aspects of a dispute and exercises all the powers of a sitting judge. The key difference from arbitration is that the case remains in the court system, employs the same rules of procedure and discovery, and enjoys the same right to appeal as any court case.  

The benefits of using a judicial reference clause are numerous.  Just like arbitration, the parties choose the decision-maker, though the case remains in the court system and the parties have full appellate rights.  The judicial referee also handles all phases of the litigation and gains familiarity with the parties and the dispute.  And judicial reference is usually as speedy as arbitration.  Of course, if keeping a case in the courts is not advantageous for one reason or another – perhaps you don’t want to have a decision be appealable – arbitration might be a better route. 

Selecting the Arbitration Service:  Judicate West, JAMS, or AAA

Various private organizations offer arbitration services to help resolve disputes, and these services are usually outlined in the arbitration clause.  The service selected will typically provide the rules for arbitration, a selection of arbitrators, and even the facilities where the arbitration will take place.  There are three major private organizations that parties typically use: Judicate West, Judicial Arbitration and Mediation Services (JAMS) and the American Arbitration Association (AAA).  

In many ways the rules used by these services overlap, but in some areas they present key differences.  For example, under the AAA rules, the arbitrator has lots of discretion and authority to order the extent of discovery, whereas under the JAMS rules, the parties are obligated to “cooperate in good faith in the voluntary and informal exchange of all non-privileged documents and other information relative to the dispute or claim.”  Depending on the type of dispute you could potentially be arbitrating, you will want to discuss these differences with your attorney.  You will also want to get to know the selection of which arbitrators the services employ, as selecting the arbitrator is one of the most important decisions in the entire process.  Choose wisely.    

Venue

Although the arbitration service and that service’s rules may provide a venue provision, venue can often be established contractually within the arbitration clause itself.  Sometimes the selection of venue is a no-brainer, as you will want to arbitrate in an area convenient for your business so as to limit traveling.  But what if the contract is to be performed far away from your business headquarters?  What if most of the parties reside far away from each other and choosing a central location is preferable?  Selecting venue, much like deciding on an arbitration service, should not be overlooked.

Arbitration vs. Mediation

While a full discussion of mediation is beyond the scope of this paper, we did want to make a comment.  It is not unusual for us to hear a client say, “I want to go to non-binding mediation.”  So there is no confusion, mediation, by its very nature, is non-binding.  Stated simply, mediation is a process whereby the parties to a dispute meet with a third party (often a retired judge) whose job it is to help the parties settle the matter.  The mediator is not there to decide who is right and who is wrong; the mediator’s job is to help settle the matter.  Obviously, mediation can be a useful tool in resolving a dispute, but like any other tool, there is a time and place.  As a voluntary process and as one where the mediator does not render any decision (other than advice), it is generally important that both parties have a desire to resolve the matter for it to be successful.

Conclusion

Whether to litigate or arbitrate?  When to mediate?  These are things to consider as you are entering into an agreement and to further consider at the time a dispute arises (assuming it is not already covered in the agreement.)  To discuss further, please contact Ross Schwartz, Dick Semerdjian, Kevin Cauley, or John Moot at 619.236.8821.