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Arbitration Is Better For Business

Thomas R. Spencer
Arbitration Is Better For Business Thomas R. Spencer*

People or firms engaged in any type of business in America today need to know something about the system of the resolution of disputes. Prior to entering into any agreement, it is wise to anticipate how disputes will be resolved. The resolution of disputes is very expensive, time consuming and frustrating. But proper planning will help reduce the financial risk, position the business better to favorably resolve the dispute and lessen the financial exposure.  Understanding the broad outlines of dispute resolution will better prepare the business to direct its counsel. Resolution of Business Disputes

Business disputes are resolved today, by: (1) voluntary negotiation and settlement or work-out; (2) court litigation in either State or Federal Courts; (3) Mediation, or (4) Arbitration.  All agreements should  clearly specify the method of dispute resolution. If the parties wish only to litigate the dispute in court, the agreement should specify the “venue” or location of the courts, designate which State’s law will govern the agreement and provide for how attorneys fees and costs will be assessed between the parties. Usually, all courts today will refer disputing parties to Mediation before a trained and licensed Mediator. That person will not have the right to adjudicate or decide the dispute, but will help the parties (and their lawyers) settle the dispute. If the matter is not settled, the case will be presented to the Court and perhaps a Jury. The average time in America today for the adjudication of a dispute by litigation is between 13 to 20 months. After adjudication, a litigant normally has a right to at least one appeal, which could take another year. Appeals are normally decided on purely legal and not factual issues.

Arbitration is a good alternative to court litigation

Arbitration is a procedure specified by the parties in their agreement. A typical arbitration clause will be inserted into the contract, after negotiation. One common form of clause is as follows:“Any dispute or claim arising out of or relating to this contract, or the breach thereof,         shall be settled by arbitration administered by [ insert the name of the arbitration         administrator, such as the American Arbitration Association] in accordance with its     Commercial [or other] Arbitration Rules. Judgment on the award rendered by the       arbitrators may be entered in any court  having jurisdiction thereof.”

By virtue of the above clause inserted in the agreement, the parties not only vest the resolution of the dispute with arbitrators, but they also agree that the Award of the Arbitrators may be enforced by a court, if the losing party does not honor the award. All State courts and Federal courts will enforce proper arbitration awards.

 Weigh the Benefits of Arbitration

By agreeing in writing that disputes will be resolved by arbitration, the parties do some very important things:

(a)    They make clear that all disputes are arbitrable. Thus, delay tactics, such as those used to stretch out payment obligations, are reduced.

(b)   By inserting the name of the arbitration organization which will supervise the arbitration, the parties automatically incorporate a complete set of rules of informal procedure, used commonly to resolve similar disputes. The American Arbitration Association, for example, has very clear rules, prepared after hundreds of thousands of proceedings.

(c)    The location of the dispute resolution proceeding is agreed upon.

(d)   The matter will be decided by experienced arbitrators, selected by the parties, who have expertise in the general area of the business. For example, in a construction dispute, the parties would specify the use of Construction Arbitration Rules, and select arbitrators who have experience in construction disputes. The same is true for Maritime Disputes, Commercial matters, Employment disputes, Labor disputes, etc.

(e)    The arbitrators are experienced, vetted adjudicators. They will take the time to hear the evidence and decide the dispute in a more informal procedure than court litigation. The parties can agree on one or three arbitrators to decide the dispute. Obviously, a three arbitrator panel will cost more and involve more time in procedure.

(f)    Discovery procedures are very limited, saving the parties substantial time and expense.

(g)   The parties can agree, by separate clause, that the costs and attorneys fees will be assessed by the arbitrators against the losing party. Not only does this add benefit, but it acts to encourage settlement discussions at an early time.

(h)   The arbitration hearings tend to be much more informal than court proceedings; the arbitrators are not bound by formal rules of evidence, nor the rules of procedure utilized and required by law.

(i)     Arbitrators decide and do not settle or mediate disputes. Their function is simply to hear the evidence, the views of the parties and make a final and binding decision.

Comparisons to  Court Litigation

Court litigation involves specific Rules of Evidence and Procedure, following a body of Statutory and case law precedent. Moreover, a complex Discovery process involves time and substantial expense. However, judged decisions are subject to appeal. Arbitration awards are more or less final and conclusive without the right to appeal, except in very unusual circumstances. Therefore, a person agreeing to or insisting on arbitration as a dispute resolution procedure must understand the financial trade-off. Once the contract is signed, a party has no alternative if an arbitration clause has been inserted. In almost all circumstances, the party is forced to arbitrate—even if he or she changes views on the dispute resolution benefits. Courts enforce arbitration clauses just as they would enforce contracts.

Careful Planning Makes Better Contracts

Parties negotiating a contract need to decide what is better for them. Business disputes are much better suited to arbitration than personal or consumer disputes. Parties need to weigh their legal position and consider what they are giving up for the informality, reduced cost, speed,  expertise and finality of arbitration. Parties need to carefully draft the contract clauses and cover their expectations. They need to think beyond the business terms of the contract and consider various scenarios of enforcement of the contract. Like all negotiations, economic benefits and risks must be evaluated, usually with the assistance of a competent lawyer.

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*Tom Spencer is a Miami and Washington, D.C. business lawyer and arbitrator. He is a Fellow of the Chartered Institute of Arbitrators. www.spencer-lawfirm.net.nter article content]