Do your contracts have an arbitration clause for resolution of disputes? These clauses have become quite common as they seem to offer a civilized alternative to courtroom litigation. But beware. You might not get what you expect by agreeing to arbitration.
By agreeing to a short, standard arbitration clause you could be giving up many of your rights, including your right to discovery (getting documents and information from the other side before you go into the courtroom), your right to a jury trial and perhaps most importantly, your right to appeal decisions that are in error. By agreeing to this seemingly innocuous clause, you are agreeing to a method for dispute resolution which may not be to your advantage or be fairly applied.
Some arbitration organizations — like the AFMA — enjoy a good reputation for the conduct of their arbitration proceedings. Even so, the arbitrator has enormous control over the conduct of the arbitration and fundamental injustices may occur.
I can give you an example. The executive producer of a low budget film brought a claim before the American Arbitration Association ("AAA") against the producer for failure to deliver the film. After a hearing, the arbitrator decided against the producer. However, when he learned that his award would be difficult to collect, the arbitrator allowed the executive producer to bring a claim against the cinematographer of the film.
While there was a contract between the executive producer and the cinematographer, it did not provide for arbitration before the AAA. The director and the cinematographer were friends and had worked together on this film and on a number of projects in the past. The cinematographer also happened to have sizable personal assets.
The arbitrator refused to hold a hearing on the claim against the cinematographer. Without taking any evidence and without affording the cinematographer basic procedural safeguards, the arbitrator ordered the cinematographer to pay a large portion of the judgment against the producer.
Rule 1 and rule 2 of the AAA provide that the parties to an arbitration must consent to the AAA's jurisdiction. When the AAA was informed of the action taken by the arbitrator, their only response was that once the arbitration starts, the arbitrator has complete control over the proceedings. In other words, the AAA blithely allowed the arbitrator to ignore the AAA's most fundamental rules.
Appealing an arbitrator's award is strictly limited. For the most part, you are stuck with whatever the arbitrator decides. Fortunately, in this example, it may be possible to set aside the award and the matter is now before the court.
Further, arbitration can be expensive. The parties must pay an arbitration administrative fee. This amount is sometimes equal to a flat fee plus a percentage of the amount being claimed, perhaps 1%.
In addition, the parties must pay the cost of the arbitrator, or arbitrators. Often, arbitrations are heard before a panel of 3 arbitrators. (Since the decisions are largely non-appealable, having more than one arbitrator lessens the chance of a rogue arbitrator taking over as we saw in the example.)
The AFMA has designated hourly rates for its arbitrators. Currently that amount is $300 per hour for the first 16 hours and $325 per hour thereafter. However, the AAA has no such guidelines and arbitrators frequently charge $500 per hour or more. When you add up the time for pre-hearing matters, discovery (to the extent allowed), the arbitrator's preparation time for the hearing, the actual hearing and post hearing matters, the amount of time can be considerable. When multiplied by 3 arbitrators, it can be very costly indeed.
While arbitration costs and attorneys' fees can sometimes be awarded to the prevailing party, all these costs and fees must be paid in advance. And should you fail to win the case, you may be forced to pay all of the arbitration costs, all of the arbitrators' fees and your opponent's attorneys' fees.
Of course, the alternative of litigating in the courts is not always the answer. There are important advantages and disadvantages that must be considered before deciding to use the courts to settle disputes. These factors should be considered along with the pros and cons of using arbitration before choosing what should be included in your contract. It is important that your selection be made only after understanding the relative merits of both alternatives. Taking the simple route can sometimes lead to unwanted consequences.
We at Kaye & Mills would be happy to discuss this with you, or to answer any questions you might have. Just give us a call.
NOTE: These articles and excerpts are provided on the condition that they cannot be referred to or quoted in any legal proceeding. The reader is strongly urged to consult with a lawyer for legal advice on these matters. Any reliance on the information or excerpts by someone who has not entered into a written retainer agreement with the lawyer providing this information is at the reader's or recipient's own risk.