Your best option?

Gary Pemberton, litigation partner at
Shulman Hodges & Bastian LLP, is
always amazed at how often businesspeople negotiating a contract consider
arbitration clauses to be the Holy Grail.

“I think that’s a mistake, because arbitration is not necessarily the best vehicle for
every type of dispute,” he says.

“Before you even place an arbitration
clause in a contract, put a lot of thought
into whether it is right for the deal you are
negotiating. If it is, try to visualize what
kind of potential disputes could arise with
the contracting party, and then tailor the
clause to address those contingencies.”

Smart Business talked to Pemberton
about the pros and cons of arbitration

What are the advantages of arbitration provisions in contracts?

One is privacy. Unlike litigation, arbitration does not involve a public filing, a public litigation and a potential public trial. It is
conducted behind closed doors, generally
with no court reporter, there’s no file for
the public to review and, generally, the
decision is kept confidential.

Arbitrations also tend to be quite informal, rules of evidence are relaxed and discovery is limited, making them typically
less expensive. They are also more convenient; you can agree on an arbitration
date and be fairly certain that the case will
be arbitrated the day that it is set.

If the matter is complex, you can select
arbitrators that have expertise in the matters being litigated, unlike a court proceeding where the jury won’t and the judge may
not have that expertise.

One of the nice things about arbitration
— especially with two parties that want to
continue to do business together — is that
it tends to be more civilized. Unlike court
litigation, there’s usually not as much acrimony and good business relationships
don’t go down the tubes.

What are the disadvantages?

Things go wrong. The reasons that companies originally wanted to arbitrate turn
out to be diametrically opposed to what actually occurs.

First, arbitration is not always quicker.
Simply whether a case is required to be
arbitrated may be litigated itself. If the parties do not agree that the arbitration clause
is enforceable, you can spend a year litigating whether the clause is applicable. Arbitrations also can get expensive. Arbitrators
can bill out at $3,000 to 5,000 a day for their
services. For a panel of three, that’s a lot of
money — especially where, unlike California state courts with their fast-track requirements, there is no formal incentive to efficiently use time and move a case along.

Unlike a court trial, there’s generally not a
mechanism to dismiss a meritless case with
a summary judgment procedure. Even the
most frivolous arbitration cases may be
taken all the way to a hearing.

Also, there is no mechanism to compel
third parties who belong in the arbitration
but were not parties to the arbitration agreement to be brought into the arbitration.

Results can be less predictable since arbitrators are not required to follow the law
and there is no right of appeal simply
because the arbitrator gets the law or the
facts wrong. There’s also the belief that
arbitrators tend to compromise too much.

Because there’s no right of appeal from
an arbitration award simply because it is
wrong, you can be stuck with a bad the
decision, whether it’s right or wrong,
unless you can demonstrate it was the
result of fraud or the arbitrator is not truly
impartial. (It’s believed — at least by some
attorneys — that not all arbitrators are
truly neutral. They are human like everybody else, and in order to continue getting
business from companies or attorneys
involved in a lot of arbitration disputes,
they don’t want to make those companies
and attorneys terribly unhappy.)

What factors should a company consider
before deciding to put an arbitration clause
in a contract?

  • If a dispute develops, who will have the
    evidence? If your adversary in an arbitration will have all the witnesses, evidence
    and documents, not having significant discovery can be a substantial detriment, and
    arbitration may not be right for you.

  • Do you want to have summary judgment and adjudication procedures included in the arbitration clause? When you’re
    involved with a party that historically files
    frivolous lawsuits, it’s wise to do so.

  • How is the other party in the contract
    viewed in the community as opposed to
    your company? If your potential opponent
    has a great reputation, you might not want
    to be in front of a jury and might want to go
    the arbitration route.

  • How crowded is the local court’s docket? If it’s heavily congested, it’ll probably
    take longer to get the matter resolved than
    an arbitration would take.

  • How important is your company’s public image? Arbitration’s privacy will minimize the impact of litigation on your company’s image.

  • Will the issues in a potential conflict be
    simple or complex? If complex, you might
    want the expertise of an arbitrator.

  • Is there a concern about potential punitive damages? Juries are more likely to
    become impassioned and hand out punitive damages, sometimes excessive.
    Arbitrators tend to be more reasonable and
    less emotional than juries.

GARY PEMBERTON is a litigation partner at Shulman Hodges & Bastian LLP. Reach him at (949) 340-3400 or [email protected].