To Arbitrate or Not to Arbitrate

When a party is ready to assert a claim, an attorney usually is contacted and papers are drafted and filed with a court of proper jurisdiction. It has become increasingly popular, however, for parties to agree, in advance, to arbitrate any disputes instead of going to court. Unfortunately, the parties often do not understand their rights and obligations under an arbitration clause.

In order to have an enforceable arbitration provision, it must be in writing, signed by both parties, and be mandatory in nature, so that neither party has the option of refusing to arbitrate and instead filing in court. A typical arbitration provision might be similar to this example for the state of Connecticut:

    Any controversy that shall arise between the seller and buyer regarding the rights, duties, or liabilities, hereunder, of either party shall be settled by arbitration in accordance with the rules of commercial arbitration in effect with the American Arbitration Association. Such arbitration shall be before one disinterested arbitrator and shall be held in the [c]ounty of New Haven, [s]tate of Connecticut. The arbitrator shall determine the controversy in accordance with the laws of the [s]tate of Connecticut and the award rendered by the arbitrator shall be final and judgment may be entered upon such finding in any court of competent jurisdiction. The buyer and seller shall share equally in the expense of such arbitration.

If a dispute arises, the claimant (the party asserting a claim) contacts the nearest office of the American Arbitration Association (AAA) with a copy of the claim sent to the respondent (the party against whom the claim is made). A filing fee usually is set according to the amount of the claim. The AAA contacts the respondent, asks both sides to indicate if they will be represented by counsel, and begins scheduling hearings.

Up to this point, the arbitration procedure resembles the procedure used in court disputes. However, now arbitration begins to differ in several ways from court proceedings. Perhaps the most radical difference is the right of the parties to obtain information. Court proceedings include "discovery" procedures, during which a party may require the other to answer questions, produce documents, and testify—all under oath—with the intent of obtaining additional information about the strengths and weaknesses of the case.

Many parties—and attorneys—are surprised to find out that, without the agreement of all parties, there is no provision for conducting discovery in arbitration. The only way someone may be forced to produce documents is by being served with a subpoena in conjunction with an actual hearing being held. So, although a party may appear in court at the time of trial with a good idea of what the other side will present and claim, such is not the case in arbitration. This spirit of adventure is not always appreciated, particularly by lawyers who want or need the assurances discovery can offer them.

Parties who realize that they cannot engage in discovery during arbitration occasionally try to sidestep mandatory arbitration by filing the claim in court. However, courts usually will enforce properly drafted arbitration clauses, and normally will grant a motion to dismiss.

Another major difference between arbitration and court proceedings is the hearing itself. Even when the claimant and respondent both are represented by attorneys, rarely will an arbitrator strictly apply the rules of evidence, which gives the proceedings an overall air of being less formal. Evidence, particularly hearsay evidence (such as an out-of-court statement offered as the truth), often is admitted in arbitration hearings—something not allowed in more-formal court proceedings.

Just as in court trials, post-hearing briefs often are filed in arbitration proceedings, then the arbitrator files a written decision. However, unlike court proceedings, an arbitrator has no legal requirement to explain the decision, and indeed the arbitrator rarely offers much more than a sentence or two. That's because most states have a statute that basically says that unless fraud can be shown, an arbitrator's decision will not be overturned, even if it is not legally correct.

Not legally correct? Yes, unlike the court system, if arbitrators make an error of law, too bad. This illustrates another strength and weakness of the arbitration process—the possibility of successfully appealing an arbitrator's decision is slim to none.

Once the decision has been rendered, if the losing party does not comply, an award can be filed with the court, converted into the equivalent of a court judgment, and sought by appropriate measures. This usually is called a "motion to confirm," and it almost always is granted; fraud must be clearly and convincingly shown to object successfully.

The advantages of going into arbitration are clear: As legal fees spiral out of sight, it is possible to assert a claim, have it tried before a competent arbitrator, and get a decision much sooner and much cheaper than by going to court. The trade-off is no discovery, the absence of a few other procedures (such as that the court system may allow for the attachment of property or motions to force an unwilling party to do something), less-formal proceedings, and finally, the unlikely possibility of appeal.

The costs that might be incurred litigating a matter in court versus having it arbitrated are illustrated in a recent case in which a landlord filed suit claiming that he was entitled to unpaid rent for 18 months, the time period that it took the tenant to obtain the various building and zoning approvals to open its business. The dispute basically focused on whether obtaining these approvals was a condition precedent to the rent becoming due.

In normal court proceedings, depositions could be expected from the plaintiff, the defendant, a town official, and the tenant's franchiser. Factoring in a reporter's costs and legal fees, this aspect of the case could cost $3,000 to $5,000. Additional work to draft and respond to the pleadings, various court motions, trial preparation, and one day of trial probably would add another $5,000. Finally, post-trial briefs, if requested by the court, might be another $2,500. The proverbial day in court would cost each side $10,000 to $15,000 using conventional methods.

With arbitration, on the other hand, plaintiff's filing fees for arbitration were $750. No discovery was allowed for either side. The witnesses were heard in one day, and the arbitrator did not request post-trial briefs. Total cost: less than $5,000 for each side.

In part because of these cost savings, consider arbitration for disputes arising from agreements. Discuss the pros and cons with experienced counsel. It could make a big difference later.

Hanon W. Russell, CCIM, JD

Hanon W. Russell, CCIM, JD, is a partner in the firm of Cantor, Floman, Russell, Gross, Kelly, & Amendola, P.C., located in Orange, Connecticut. Russell can be reached by phone at (203) 795-1211 or by e-mail at hwr@chesscafe.com. The discussion of legal issues involved in this column is for informational purposes only. Results may vary depending on state laws and particular facts.