Arbitration Vs. Litigation

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Arbitration is generally thought to be faster, and cheaper, than litigation. Why, then, would arbitration not replace trials entirely?

While there are benefits to arbitration, there are also drawbacks. For example, the constitutional guarantee of a jury trial is inapplicable in arbitration proceedings. Further, while judges must provide their reasoning along with the decision rendered, arbitrators are not similarly required to provide rationale. In addition to this lack of required rationale, the limited record kept during arbitration proceeds limits judicial review of the proceedings in a way in which judicial review of a trial is not limited. See 4 Am Jur 2d Alternative Dispute Resolution § 11.

EXAMPLE: Sally and Suzie, sisters from Seattle, submit to voluntary arbitration suggested by the judge in their pending case (Sally sued Suzie saying she stopped singing despite an agreement to sing all day for $6,000). After an emotional morning of proceedings, the arbitrator returns after lunch and says the following

“Judgment for Suzie. No damages to Sally. Goodbye.”

Upon hearing this Sally grabs the arbitrator by the lapels and sobs “Why? Why?” Alas, the arbitrator simply removes his jacket from her clutches, retrieves his briefcase, and leaves the room.

While somewhat fanciful, the above example clearly emphasizes the possibility of leaving a party wanting when she is ruled against and no rationale is provided. In some cases, hearing a reason is at least somewhat comforting to the losing party. Of course, the fact that arbitrators are not required to provide rationales for their rulings does not mean that they are barred from doing so, and in fact most usually explain at least in general terms how they arrived at the decision at hand.

Even if Sally is provided some reason for the arbitrator’s decision against her, she may want to seek some sort of appeal from the arbitrator’s decision. In a trial, Sally could appeal a decision for any number of reasons. If a higher court decides to hear her appeal, issues of fact will be reviewed using the “clearly erroneous” standard while issues of law will be reviewed “de novo”. See, e.g., Icicle Seafoods, Inc. v. Worthington, 475 U.S. 709 (1986), Anderson v. Bessemer City, 470 U.S. 564 (1985), Cooper Indus. v. Leatherman Tool Group, 532 U.S. 424 (2001).

EXAMPLE (1): Jack sues Janet, his roommate, for nonpayment of rent. Janet claims that she left the rent on the kitchen counter, but Jack claims he never received the money. The judge, as finder of fact in this case, finds that Jack did receive the money. Jack appeals the decision, but the higher court refuses to impose its decisions as to whether or not Jack got paid. Instead, the appeals court notes that there was substantial evidence for the lower court’s finding and that the clearly erroneous standard must be applied. Because the lower court’s judge’s finding of fact was not clearly erroneous, it will not be set aside, even if another finder of fact might have decided otherwise.

EXAMPLE (2): Jack and Janet had lived together in California, which is where the incident giving rise to Jack’s claim took place. Jack now lives in Arizona while Janet lives in Ohio. When Jack sues in an Ohio court for nonpayment of rent, the court applies Ohio law. Jack appeals, claiming that California law should apply. This time, the appeals court may rule on the issue, as it is a question of law, not a question of fact, which may therefore be reviewed de novo.

These, then, are the general standards which apply to an appellate court’s review of a lower court’s decision. Of course, in application, it is not at all this simple. Nonetheless, the general standards for questions of fact and questions of law are clear.

Compared to review of arbitration awards, the possibility of having a court's decision changed seems extraordinary. After all, in order to successfully apply for court review of an arbitrator’s decision resulting in the court vacating the award (i.e., setting it aside), the party must show one of the following:

1. The award was procured by corruption, fraud, or undue means.
2. There was “evident partiality” or prejudicial misconduct.
3. The arbitrator exceeded her power.
4. The arbitrator refused to postpone proceedings based on a showing of sufficient cause.
5. The arbitrator refused to hear material evidence.
6. Any other misbehavior prejudicing the party’s rights, especially those granted by the FAA or UAA (whichever applies). (The “catch-all” provision.)
7. Under the UAA, but not the FAA, the absence of an arbitration agreement coupled with other facts might be cause for a court to vacate the award on review. See UAA, § 12(a)(5) or Delaware UAA § 5714(a)(5).

Short of vacating the arbitrator’s award, a court may review the decision with an eye towards modifying or correcting the award upon a showing of any of the following:

1. An “evident” or material miscalculation of figures or an evident mistake in the description of any person, thing, or property referred to in the award. (In other words, some sort of clerical error or transcription error.)
2. The arbitrator decided on some matter not submitted to her for decision. This is not cause for modifying or correcting if the additional matter ruled upon does not materially affect the matter(s) submitted for decision.
3. The award is “imperfect in matter of form” and does not affect the merits of the controversy.

For the FAA, the relevant sections are §10 and §11. For the UAA, the relevant sections are §12 and §13. The overlap between the federal act and the model for state acts is almost complete. The UAA for Delaware also has nearly identical provisions found at §5714 and §5715 of that act.

EXAMPLE (1): Throughout arbitration proceedings, the arbitrator constantly refers to one party as “the weasel.” The arbitrator ultimately finds against this party. This would likely constitute “evident partiality” such that a court could vacate the award.

EXAMPLE (2): Sally sues Burt over ownership of a prize stallion. The court mandates arbitration, and the arbitration hearing results in an award of $50,000 to Sally, which is thought to be half the value of the horse. As it turns out, the calculation was based on a horse that is 4 years old, but the horse in question was 6 years old and therefore substantially less valuable. When Burt brings this to a court, the award may be modified based on the horse’s correct age.

As a practical matter, this means that an arbitrator’s award will rarely be subjected to significant scrutiny by a court and will be even more rarely vacated or altered in accordance with the above provisions. This leads to the further consequence that losing parties in an arbitration will rarely bother to seek judicial review of the arbitrator’s award. That said, successful appeals from arbitration awards are not unheard of. A sampling of cases might help give a general understanding of the way courts rule:

• Rokan Partners v. HTK Mgmt., L.L.C., 2002 Wash. App. LEXIS 2000 (2002): Arbitration award affirmed where the losing party argued unsuccessfully that the arbitrators were partial. Also unsuccessful was the argument that arbitrators’ method of valuing land was contrary to Washington case law.
• Terk Techs. Corp. v. Dockery, 3 Fed. Appx. 459 (6th Cir. 2001): Where a witness committed perjury but the arbitrator did not consider that witness' testimony, the perjury is not sufficient cause for a court to set aside the arbitration award as an award based on fraud.
• Raytheon Co. v. Automated Business Sys., 882 F. 2d 6 (1st Cir. 1989): Even though the arbitrators made no formal findings of fact and provided no rationale for the award, the award will not be set aside. Further, the court held that if a defendant’s conduct could have exposed the defendant to punitive damages in court, an arbitrator could award punitive damages even though the arbitration clause in question did not explicitly provide for such.
• Bonar v. Dean Witter Reynolds, Inc. 835 F.2d 1378 (11th Cir. 1988): District Court erred in failing to set aside the arbitration award. Under FAA §10(a) the award should be vacated because the “expert” witness for the successful party used fraudulent credentials.

Therefore, while there are certainly advantages to arbitrating a dispute rather than seeing litigation through to its end, there are also definite disadvantages.

One disadvantage of arbitration not yet discussed stems from the attempt to pick arbitrators in a fair and equitable manner, called the “party arbitrator” system. In order to pick a panel of arbitrators such that there will be no overwhelming bias in favor of one party, arbitrators are sometimes selected as follows: Each party to the arbitration selects an arbitrator. Those two “party” arbitrators then select the third arbitrator (or sometimes a third and fourth, as in Delta Mine Holding Co. v. AFC Coal Properties, Inc. 280 F.3d 815 (8th Cir. 2001). In theory, this ensures that the third arbitrator is truly neutral. As Delta Mining reveals, however, the question sometimes arises as to the party arbitrators’ proper roles, and their obligation to disclose information.

Of course, despite these potential disadvantages, the arbitration movement in the United States (and around the world) continues to grow. A few (staggering) numbers.

• According to the Federal Mediation & Conciliation Service website (www.fmcs.gov), they provide arbitration panels to nearly 20,000 customers per year, at an average daily cost of arbitration of approximately $3,500. Their average arbitration proceeding takes less than 4 days.
• The American Arbitration Association has over 8,000 arbitrators worldwide. The AAA has arbitrated a total of over 2 million cases. In 2004, the AAA took in fees well in excess of $72 million, and in 2002, they administered over ten times as many cases as FMCS (almost a quarter million!), the majority of which were mediation or arbitration. (see www.adr.org for more information).

The National Arbitration Forum (www.arb-forum.com) has also collected some telling facts:

• More than 50% of trial attorneys believe arbitration is cheaper than litigation, and over two-thirds believe it is faster.
• Individuals are slightly more likely to come out winners in arbitration and are likely to be granted slightly higher awards.
• Over 90% percent of consumers who use arbitration find it fair, and over half of American consumers would choose arbitration over litigation when seeking monetary damages.

One thing is clear: there are more than a few people out there who think the benefits of arbitration outweigh the drawbacks, and that arbitration is preferable to litigation.

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