Making Arbitration Less Arbitrary

What is arbitration?

• Arbitration is the rough equivalent of going to court. One or more arbitrators render a binding decision, and arbitrator awards are fully enforceable in courts of law.
• Arbitration is not mediation. Mediation is a process for attempting to settle a dispute, usually through shuttle diplomacy. Mediation is effective only if the parties enter into a settlement agreement.

How does arbitration stack up as an alternative to court?

• Arbitration is generally thought to be more efficient than court proceedings – unfortunately, some of the perceived advantages are not always realized.
• When properly administered by a trained arbitrator, arbitration can be streamlined, less formal and less intimidating, and less expensive than resolving a dispute in court.

What types of parties agree to arbitrate their disputes?

• Often, one party to an agreement seeks to avoid courts that the party believes will be unfavorable.
• Arbitration is confidential, and many parties prefer that disputes not be public.
• Parties who would prefer not to arbitrate are sometimes leveraged into entering arbitration agreements, such as consumers in credit or similar agreements.
• For well over 100 years, the construction industry declared its preference to arbitrate. This is in part because appointed construction arbitrators typically understand construction projects and issues.

What are the perceived disadvantages of arbitration?

• Utter finality: under standard arbitration rules employed by the American Arbitration Association (AAA), the Federal Arbitration Act, and corresponding state acts, there is no traditional appeal of an arbitration award.
• Lack of appeal means that errors – like the misconstruing of facts and even utter misapplication of the law by an arbitrator – are generally unassailable in court.
• The potential for the “empty chair”: this is the party someone wants as either a defendant or plaintiff in the arbitration proceeding that cannot or will not join due to lack of sufficient arbitration agreements to allow the joinder.
• While, as a matter of law, courts are generally reticent to meddle with or disturb arbitration awards, there is no shortage of court decisions addressing arbitration award and procedure idiosyncrasies. In just the six months prior to the publishing of this article, courts have:
  • Granted $6 million in prejudgment interest on top of an arbitration award when the arbitrator refused to do so.
  • Refused to accept one party’s refusal to arbitrate based upon alleged lack of “sophistication” when entering the arbitration agreement.
  • Refused to compel claims against a surety to be arbitrated – but then issued a stay for those claims in court while an underlying claim against the surety’s contractor principal was arbitrated to conclusion.
  • Refused to compel arbitration where conflicting dispute resolution provisions existed in contract documents regarding court versus arbitration.
  • Refused to compel arbitration claims against a seller of materials despite the seller's authorized sales agent having individually agreed to arbitrate.
  • Allowed obvious double recovery in an arbitration, refusing to find that the acknowledged error by the arbitrator was a legally correctable “evident material miscalculation of figures.”
  • Refused to vacate an arbitration award despite the arbitrator expressly violating the arbitration rules for reconsidering and re-ruling upon substantive matters contained in the arbitrator’s award.

Can arbitration be a viable and advantageous means for formal dispute resolution? The answer is: "Yes.”

• Interestingly, the solution to many of these issues is not nearly as much in the hands of arbitrators (or the agencies supporting them, like the AAA), but is largely in the control of the potential parties to arbitration.
• The agreement between the parties to arbitrate can control the arbitration initiation, the applicable rules, the applicable law, the means of selecting arbitrators, and the actual arbitration hearing itself.
• According to the AAA, key components of a good arbitration agreement may include agreement on:
  • Number of arbitrators
  • Arbitrator qualifications
  • Locale provisions
  • Governing law
  • Discovery
  • Documents-only hearing
  • Duration of arbitration proceedings
  • Remedies
  • Assessment of forum fees and attorneys’ fees
  • Opinion accompanying the award
  • Confidentiality
  • Non-payment of arbitration expenses
  • Appeal

The list above leaves out the issue of joinder, which establishes a means by which third parties – through separate contracts and otherwise – can be joined in arbitration to avoid the “empty chair” problem. Other considerations may also be present depending on the relationship between parties that propose to agree to arbitrate future disputes.

Empirically, arbitration can be a more satisfactory means to achieve formal dispute resolution than going to court. Before taking steps to enter an arbitration agreement, however, it is wise to speak with an attorney.

Please contact Daniel Lund III or any other member of Phelps’ Construction Law team if you have questions or need advice and guidance concerning arbitration and agreements to arbitrate.