Let’s say you are considering updating your form contract, or you are in the midst of negotiating a new contract with someone. Should you include mandatory arbitration for resolving any disputes? Assuming you have the choice, my view is you should only include arbitration if at least one of these five factors are present:
1. Having a knowledgeable industry professional decide the dispute is very important (an architect, engineer, doctor, reinsurance expert, etc), instead of a judge or jury without that expertise, because disputes are likely to be very technical.
2. Keeping the proceedings confidential (and not publicly available in court filings) is very important to you. (Although, if either party moves to vacate, much of your arbitration proceeding could become part of a court record.)
3. You do not want class actions. (They can be precluded in an arbitration agreement; it is less clear whether they can be precluded without an arbitration agreement.)
4. You want to arbitrate because other parties on the same project or deal have arbitration provisions. (For example, if the owner and general contractor on a construction project are bound to arbitrate, the owner and architect may also want to agree to arbitrate in case the architect is implicated in claims between the owner and general.)
5. There is a chance that you may have to enforce a judgment in a foreign court. The New York Arbitration Convention allows the winning party in an arbitration to enforce its judgment abroad much more easily than if the judgment had come from a U.S. court, which is important if the loser’s assets are located abroad. [*Note that the original version of this post only included the first four reasons. But I received useful feedback via Twitter and email about this additional benefit of arbitration over litigation and added it to the list. Thanks for the input!]
It is a relatively short list. But, in my view, these are the only four bases on which arbitration has a significant advantage over litigation. You will note that speed of resolution is not on the list (unless parties opt for expedited proceedings, arbitrations generally take about as long as court proceedings — the median case valued between 1 and $10 million dollars administered by the AAA took 414 days to get to an award). You will also note that cost is not on the list (in my experience on complicated commercial matters, there is no cost saving to arbitration and I found a recent study supporting my anecdotal evidence). Speed and cost used to be the primary reasons people chose arbitration.
There are other potential reasons to choose arbitration that I am also discounting. For example, the risk of an illogical jury verdict is not significantly greater in my mind than the risk of an illogical arbitration award. I also do not see any advantage to the greater informality and looser rules in arbitration, or find it less adversarial. And, although you can make someone conduct the arbitration hearing in the basement of your building, you could just as easily have a forum selection clause choosing your home town courthouse in most circumstances, so I do not count that as a big advantage for arbitration.
It’s the start of a new year and a great time to step back and revisit our reasons for inserting arbitration in our contracts. I’d love to hear whether you agree or disagree with my list! Let me know @KramerLiz.