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Using arbitration agreements to manage arbitration cost and risk

Arbitration agreement strategies that may reduce some of the perceived risks and costs of arbitration

Arbitration has been under attack as too expensive, too cumbersome, too slow, too arbitrary and incurring too many of the costs of litigation but delivering few of the promised benefits of ADR. Below are strategies — many of which may be employed in the arbitration agreement itself — that may reduce some of the perceived risks and costs.

Many of these strategies require corporate counsel to be sensitive to issues perhaps more familiar to arbitration counsel, and to ask clients the necessary questions, including: What are the expected subject matters of disputes? Is the client a high-volume arbitration user? Does the client expect consumer arbitrations or sophisticated entity disputes? Will the disputes be with valued business partners? What arbitration locale makes the most sense? Are specialized technological or legal issues involved? Will there be multiple parties? Who will have access to the relevant facts and records? What are the amounts and types of damages likely to be claimed? Will disputes require expedited resolution?

Consider threshold limitations on panel size

Three-member panels are often seen as ways to reduce risk of arbitrariness. However, arbitrator fees, travel and lodging costs can be expensive. Finding consecutive days of availability is usually difficult and forces the scheduling of unwelcome breaks between sessions. To balance these risks, counsel may consider using three-member panels only for certain types of claims with ad damnums above threshold amounts.

Consider designating arbitrator background and arbitral body rules

Arbitrators may lack the requisite technical or legal background for the matter at hand. To address this issue, the agreement may require that an arbitrator have a certain technical background or a specified number of years of experience as an arbitrator, including experience with particular types of disputes. The agreement may also specify whether any non-lawyer experts should either serve as one of the “wings” or as technical experts engaged by the panel.

Arbitrator biographies may be insufficient. For example, how does one determine whether a particular arbitrator is a strict constructionist when it comes to contract interpretation? Maybe a proposed arbitrator was a former judge with published opinions, but otherwise extensive digging may be required. Clients should not unduly restrict attorney time or resources that may be devoted to the arbitrator selection process. Counsel also may want to provide for the opportunity to jointly interview prospective panelists to determine their backgrounds, management philosophies, discovery attitudes, abilities to give the case consecutive, full hearing days and commitments to pre-arbitration management.

Transaction counsel also should understand the pool of available arbitrators when designating a set of applicable rules, an arbitral body or an arbitration locale. In addition, transaction counsel themselves may also have inadequate backgrounds to appreciate the implications of adopting a particular arbitral body’s procedural and arbitrator selection rules.

Consider creative techniques

While arbitration does offer flexibility, inexperienced participants are often fearful of breaking the mold.

One technique to consider is dueling or tandem experts (or “hot tubing”), where expert witnesses are brought together for simultaneous questioning by the arbitrator. Stanley Sklar writes about this technique in “Innovations in Arbitration: Using the Tandem Witness Examination when Experts Collide” published by the American Arbitration Association. One requirement of this approach, however, is having experts with strong oral presentation skills.

Another possible technique is the use of the “chess clock” approach to establish and enforce the amount of time each side will have regarding their presentations and examinations. Such devices are used to limit windbags, duplication and the urge to have the last word on everything. 

Consider discovery limitations

One cannot be clairvoyant about exact discovery needs, but it is often possible to craft reasonable limitations on discovery. If not already contained in the arbitration agreement, there may be opportunities to craft tailored limitations during pre-arbitration conferences. Options include limiting the number and length of fact witness depositions, granting parties a certain number of choices of witnesses to depose, imposing “meet and confer” obligations to address e-discovery, or eliminating interrogatories. Completely eliminating depositions, though, may be unwise. Proceedings in which no depositions are taken may lack focus, relegate lawyers to basically deposing the witnesses on the stand during hearings, and often confuse arbitrators while de facto “discovery” is ongoing.

While limitations on document requests may seem appealing in some situations, in others they may unduly restrict the ability to obtain evidence in the possession of the offending party or third parties who may be outside the panel’s subpoena power. Arbitrators are often unsure what to do about e-discovery. Both JAMS (in its Comprehensive Arbitration Rules) and the AAA (in its new Commercial Rules) now have protocols for e-discovery as do several of the international arbitration providers.

Reform proposals

Arbitral bodies are aware of the backlash. Some have responded by collecting data to debunk misconceptions. Some have added procedures discussed in this article and others such as injunctions and appeals. JAMS and the AAA now have opt-in appellate rules that drafters may select. Some have added requirements for arbitrator training. The American Arbitration Association, for example, has a series of webinars for its panel members and insists upon “Continuing Arbitrator Education.”

There is no shortage of reform ideas. The College of Commercial Arbitrators has published a set of protocols for efficient and cost-effective commercial arbitration. Mark Friedlander proposes use of activist arbitrators for small and medium arbitrations in his recent article aptly titled "Arbitrator – Directed Arbitration, ADR with a Samurai Arbitrator," published in the Journal of the American College of Construction Lawyers. Paul Lurie proposes "Guided Choice" where mediators can suggest that the parties at an impasse may "certify" a difficult question to an arbitrator specifically hired for this task. For more on Guided Choice see Paul’s article, “Using the Guided Choice Process to Reduce the Cost of Resolving Construction Disputes”.

Thinking outside the arbitration box

All too often, the arbitration agreement is drafted at the last minute or is simply the product of one lawyer using another colleague’s “standard” clause. Sometimes there is a reluctance to negotiate contract clauses dealing with disputes. A client may also be preoccupied with a need to avoid unfriendly courts but then does not want to spend resources thinking through “merely procedural” issues. Sometimes drafters have trouble using simple and clear language. Next time you draft an arbitration clause, consider assessing your likely needs and asking a colleague who actually arbitrates disputes to provide input. The results might be illuminating.

 

This paper is not intended as a substitute for legal advice or individualized analysis of a particular legal matter. Readers should not act without seeking professional legal counsel. Transmission or receipt of this publication does not create an attorney-client relationship.

Contributing Author

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Josh M. Leavitt

Josh M. Leavitt, a principal at Much Shelist in Chicago and an elected Fellow of the American College of Construction Lawyers, may be reached at...

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