Speed & Cost: The speed of arbitration tends to be faster than a court proceeding, sometimes by as much as 33% to 66%. This alone can create cost savings. However, it should be noted that there is an expense for the arbitration panel and potential other expenses (depending on the forum) that would not apply in a court setting.
Certainty: Arbitration is a “creature of contract.” Parties to that contract can craft their preferred terms and conditions for the arbitration and can therefore build in some certainty pertaining to elements such as qualification of the arbitrators, number of arbitrators, venue, and scope of discovery. Many of the elements that are somewhat uncontrollable in traditional litigation can be better managed by the arbitration provision.
Confidentiality: Almost all arbitrations are confidential. This extends not only to the arbitration itself, but to materials and information submitted in the context of the arbitration. However, in certain arbitral forums, such as the Financial Regulatory Authority (FINRA) in the US, the arbitration award is publicly available, i.e., the arbitration itself is confidential, but the award is not. Similarly, if a party wishes to enforce an award in court by filing that award, the award then becomes non-confidential.
Arbitrability: The first consideration is whether a controversy is one that’s subject to arbitration. The United States in particular functions as a jurisdiction of one country with 50 different laws, each state having its own unique rules. Arbitration in the US is governed generally by the Federal Arbitration Act (FAA), which came into effect in 1925 and preempts nearly all state law. That being said, there are certain state and federal laws that are currently attempting to challenge the overarching reach of the FAA and exclude certain types of claims from being subjected exclusively to arbitration.
Forum & Rules Selection: Another high priority consideration is forum and rule selection. Top-of-the-line international forums include JAMS (formerly Judicial Arbitration and Mediation Services), the Institute for Conflict Prevention & Resolution (CPR), and the International Centre for Dispute Resolution (ICDR) which is governed by the rules of the American Arbitration Association (AAA). The rules of these forums are relatively the same, but there are some differences that should be researched and considered when crafting an arbitration provision.
Choice of Law: Choice of law is a consideration that is often heavily negotiated between parties. If there are multiple counterparties to a contract, parties will likely each want a jurisdiction that will be most favorable or familiar to them. The negotiations for venue often ultimately depend on which party has the most leverage. Locations such as London, New York, Paris, Geneva, Zurich, Stockholm, Singapore, and Hong Kong are often commonly chosen as venues for arbitration.
Enforceability: After achieving an award in arbitration, a party may need the courts to enforce the award. To assist with this, the United States and 171 other members states are contracting parties to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention). The Convention provides that the member states’ courts and jurisdictions will give full faith and credit to an arbitration award from a fellow member state, allowing for greater certainty that foreign arbitral awards will be recognized and enforced.
Arbitrator Number & Qualifications: When drafting an arbitration clause, parties have a lot of flexibility to dictate the characteristics of the arbitration panel. Some questions a party should ask itself include: How many arbitrators should be on the panel? Should the arbitrators have specific qualifications? Should the arbitrators have certain technical knowledge or expertise in a specific subject matter? Should the arbitrators have experience in a certain sector or industry?
Mediation: Parties should also consider whether at any point they want to require mandatory mediation. In federal litigation in the US, most districts mandate mediation at some point; however, this is not necessarily the procedure in arbitration. If a party wishes to have pre-arbitration or mid-arbitration mediation as part of its schedule, this needs to be explicitly stated in the arbitration provision.
Fee-Shifting: In the US, each party generally absorbs its own legal costs. While the arbitrators can assess costs, this is unlikely to happen unless there are specific provisions that call for it. Costs of arbitration include not just the cost of the hearing and the arbitrators, but also the associated legal fees. If a party wants a fee-shifting provision for these legal fees, this will also need to be built into the arbitration agreement.
Appeal Process: It is a common misconception that arbitrations are not appealable. Like most other arbitration factors, there is the ability to build in the opportunity for appeal. For example, an arbitration clause may provide for a one-person arbitration panel, but if the monetary value of the award for the controversy is over a certain threshold amount, the clause can allow the parties the option to appeal to a three-member tribunal.
In traditional litigation, in comparison to other countries, the United States has a very robust scope of discovery. US federal and state rules essentially try to prevent “trial by ambush” so to speak, so documents are required to be exchanged, witnesses are deposed, and written questions are put forth in the form of interrogatories. In general, a case is very well known and documented before it goes to trial.
This is true as well for litigants overseas who want to obtain discovery from a US party. A statute known as Section 1782 can be employed by a foreign company in US federal courts. Section 1782 can be used against a company/individual that’s located in that court’s district to get a court order for discovery from that company/individual.
These rules do not apply in arbitration. In most arbitrations, while there is an exchange of documents, there are rarely depositions and generally very little pre-hearing testimony. Arbitration typically has very little opportunity for discovery unless the arbitration provision expands the scope of what is available.
If a party wants to subpoena a third party, most arbitral forums give the arbitrators the power to do so. However, the subpoena is limited to compelling the third party to simply be present at the hearing and to bring any requested documents with them. Additionally, if the third party is over 100 miles outside of the district in which the hearing is taking place, that arbitration forum will have no jurisdiction over that third party.
Another useful facet of arbitration is that a party can use an arbitration clause offensively as a non-party to the underlying contract. For example, imagine a controversy arises out of a transaction that is governed by a contract with an arbitration provision and a third party who did not sign that contract—making it an outsider to the contract—is sued in court. However, the third party is being sued based on the facts and circumstances that arose out of the transaction governed by the contract. In this situation, the third party could offensively compel the contractual party to arbitrate without being a party to the arbitration agreement.
If you have any further questions regarding arbitration or international dispute resolution, please contact Roger Barton.
Roger E. Barton