Readers Talk Back:
Rethinking
Arbitration Agreements

by Dennis Ehling

    In an article in the November, 2004 issue of Transaction World, attorney Paul A. Rianda, Esq. argues that “From the perspective of an agent, the disadvantages of arbitration far outweigh the advantages. For that reason, whenever an agent is negotiating a contract with an ISO it should seek to have the arbitration provision removed.” Before taking that advice, any party to a commercial contract – be that party an agent, ISO, processor or financial institution – should seriously consider the purposes and advantages of arbitration. If properly understood, appreciated and negotiated by all parties, an arbitration agreement can become a significant and valuable part of any commercial contract.
    Arbitration agreements can take many different forms, from a simple statement that all disputes arising out of the parties’ business relationship shall be submitted to binding arbitration, to a much more complex agreement setting forth a specific set of procedures and conditions for invoking arbitration and conducting the arbitration proceedings. Because the form that an arbitration agreement can take in a contract is as flexible as the parties want it to be, it should be viewed as an area where significant negotiation is possible during the formation of the contract. How simple or complex an arbitration agreement should be in a particular contract will depend on the types of disputes that the parties anticipate might arise in the course of their business relationship and what the parties value most in fashioning an appropriate dispute resolution mechanism for their particular relationship.
    Although the reasons commercial parties adopt arbitration provisions are many, ultimately the spread of arbitration agreements in commercial contracts is attributable to the value that parties often perceive in resolving their disputes through arbitration, and two of the most significant values of arbitration are speed and cost.

Speed

    One of the primary advantages of arbitration over the judicial system is that of speed. In many states, it is not unusual for even a relatively straightforward lawsuit filed in state court to drag on for as much as a year or more while the parties jockey over various procedural and discovery disputes, with each party trying to put itself in the best posture to ultimately present its case to a jury. The date when a matter is finally set for trial will typically vary depending on a whole host of factors, including the parties’ jockeying, but often one of the most significant factors is how busy the courts are – the busier the courts are, the longer it takes to get your case before a jury. In the end, most cases end up settling before a jury is ever called, leaving the parties’ significant investment in preparing the case to be presented to a jury to some extent wasted.
    With arbitration, the length of time between filing a claim demanding arbitration of a particular dispute, at one end, and holding the arbitration hearing and receiving an award (i.e. a decision) from the arbitrator, at the other end, is typically much shorter, with that length being determined primarily by how complex the dispute itself is as opposed to how busy the courts are. In addition, owing in large part to the often less formal nature of an arbitration hearing as opposed to a jury trial, as well as to the fact that arbitrators are typically either experienced in the industry that is the subject of the dispute or dispute resolution professionals, the arbitration hearing itself typically takes less time than a jury trial on the same issues. Whether you are the party making or the party defending a claim, in many business contexts the potential for a speedier resolution through arbitration is a big plus.
    One downside to arbitration is that, in most states and under most circumstances, there are very few ways in which the losing party can challenge (i.e. appeal) the arbitrator(s)’ award, even if it appears that the arbitrator(s) completely failed to understand the facts or to follow the correct law. The risks of running into an arbitrator who just gets it wrong can, to some extent, be reduced by careful selection of the arbitrator. Moreover, if the risk of an arbitrator making the wrong decision is less daunting than the cost of facing a prolonged and potentially more costly suit litigated in court, arbitration is still the way to go. In such situations, as long as each side is given a fair opportunity to present their case and the arbitrator(s) give each side a fair hearing, the speed of a commercial arbitration can present a distinct advantage over a trial in the judicial system.

Cost

    Another substantial advantage of arbitration over the judicial system is often that of cost. Procedural maneuverings and discovery battles in court cost money, both in terms of the fees paid to lawyers and in terms of the opportunity costs of dedicating business people to participate in many of those proceedings. For many business people, the sheer cost of bringing a lawsuit to trial can make it prohibitively expensive to even fight over a dispute of as much as $50,000 or even a $100,000. In an arbitration, with less time and effort invested in procedural wrangling, discovery disputes and the arbitration hearing itself, the costs to the typical litigant can potentially be much lower, making it economically viable to resolve through arbitration disputes of $25,000, $10,000 or even less.
    That efficiency does not mean, however, that the parties are necessarily less able to adequately prepare their case for presentation to the arbitrator(s). While it is true that in a typical arbitration under the commercial arbitration rules of the American Arbitration Association the parties are not automatically entitled to any particular amount of discovery as is usually the case before the courts, the rules do specifically provide for the arbitrator to order the production of documents or other information (including pre-arbitration deposition testimony) upon the request of any party. Many arbitrators will, as a matter of course, order at least some such discovery if they are given an explanation of what information is needed and why. Moreover, the parties can themselves agree to additional discovery during the course of the arbitration proceedings.

Conclusion

    Arbitration is not always the right choice for resolving all disputes. But the existence, scope and terms of an arbitration agreement are matters that for most business people should be seen as points to be valued and negotiated – just like the price, delivery terms or restrictions on the parties’ liability – in determining whether to sign the contract. Even if one party thinks it would prefer not to have an arbitration agreement and the other party absolutely insists on one, it is still possible for the parties to make a mutually satisfactory deal by bargaining over the terms of the arbitration agreement itself, even using those terms as bargaining chips to obtain agreement on other desired provisions in the contract. Given the advantages of a properly understood and negotiated arbitration agreement in many commercial settings, businesses should consider adding and negotiating such provisions in a company’s most important contracts. So recognized, arbitration agreements need not be seen as something solely for the benefit of the economically more powerful party to a contract.

    This article is for informational purposes only. Nothing herein is intended or should be construed as legal advice or a legal opinion applicable to any particular set of facts or to any individual’s or entity’s general or specific circumstances.