Perception versus reality Featured

7:00pm EDT January 29, 2008

In many corporate circles, arbitration is a popular alternative to litigation because it’s perceived to be less expensive and faster. Perceptions, however, are not always reality.

“Arbitration is a voluntary, binding process for resolving disputes,” says Daniel V. Flatten, a partner at Porter & Hedges LLP, Houston. “It is important for business owners to know not only the availability of arbitration but its reach, scope, enforceability and disadvantages.”

Smart Business talked to Flatten about key issues that company officers should know before considering arbitration.

Does arbitration result in lower costs than litigation?

Regretfully, no. First, the cost of the arbitrators is substantial. Most are either lawyers or other experts in their fields who charge competitive rates for their experience and expertise.

Second, cases in arbitration involve the same questions, disputes, motions, hearings and discovery as disputes in private civil litigation. Depositions and written discovery are no cheaper in arbitration proceedings than in civil litigation.

What about faster resolution?

Historically, the arbitration process has not delivered. Just as in private litigation, it takes time to frame the issues and complete discovery. If a panel of three arbitrators is involved, the hearing must be scheduled when all three are available — usually a matter of months in advance.

The actual trial or hearing might be slightly shorter than a court trial, but that factor is usually outweighed by the arbitration panel’s frequent reluctance to limit evidence at argument. Added to this is the frequent dispute as to whether the controversy is even eligible to be arbitrated. The party opposing arbitration files suit either on the merits or seeking to void the arbitration agreement, and this dispute must be resolved before the arbitration itself can proceed. While well-established case law defers arbitrability decisions to the arbitration panel itself in a properly worded agreement, this is a frequent tactic that both delays the arbitration and makes it more expensive.

What is the importance of the controlling jurisdiction?

Jurisdiction is important in several ways. First, the Federal Arbitration Act and similar statutes in most states recognize arbitration and make it enforceable in the courts. While the acts do not create substantive law, all confirm strong public policy favoring arbitration and give the courts a mandate to enforce it.

Then there is a geographical aspect to the jurisdiction question. Unless the agreement says otherwise, the law of the jurisdiction in which the arbitration panel sits is ordinarily assumed to be the law governing the dispute.

How can a company involved in arbitration manage costs?

In much the same way as in general civil litigation. If the issues can be narrowed, then discovery and trial will presumably be shorter and less expensive. Unfortunately, this requires cooperation by the other side or some willingness on the part of the chairman or the arbitral panel to enforce limitations. Arbitrators are less likely to do so than courts, perhaps because they recognize the lack of an effective appellate process.

Also, the parties can agree on limited discovery — a prime driver of cost and time. In my experience, this is a mixed bag. Some limitations can be agreed on, but with electronic discovery still in its infancy, the process is becoming more expensive, not less. Here again, one needs either an agreeable adversary or a firm decision-maker on the panel to limit discovery.

General policies for reducing arbitration costs include: identifying and narrowing the issues in dispute, narrowing discovery to items in dispute, narrowing search standards for electronic discovery, reducing the number and duration of depositions, and even manning the trial team with correct levels of experience and expertise. Unfortunately, all are much easier said than done.

Who is generally responsible for paying arbitration costs?

The typical ‘American rule’ allows for each party to bear its own fees and expenses. The less-common ‘British rule’ forces the loser to pay the winner’s attorney’s fees and incidental expenses.

In addition to attorney’s fees, common expenses associated with arbitration include written discovery, expert fees and expenses, and travel. Even non-expert witnesses frequently require travel and reimbursement for time lost from work.

Unfortunately, at the time you are crafting your arbitration agreement, you don’t know whether you will win or lose.

If the agreement contains a ‘British rule’ provision, the definition of winner and loser should be considered. Under some state rulings, a judgment by the plaintiff for any recovery constitutes a win regardless of where it fits in the settlement posture of the parties immediately before trial.

DANIEL V. FLATTEN is a partner at Porter & Hedges LLP, Houston. Reach him at dflatten@porter hedges.com or (713) 226-6664.