Litigation is expensive. So a prudent business should always consider alternatives to litigation as a means of resolving legal disputes. Arbitration is among the most popular of the alternative dispute resolution, or “ADR,” techniques.
Before agreeing to arbitrate a dispute, however, businesses need to take a long, hard look at whether the benefits of arbitration really outweigh its costs. My own experience, coupled with some recent court decisions involving arbitration, has caused me to wonder whether the costs are too high.
Court decisions in Connecticut and around the country are replete with statements that public policy favors arbitration. Why? Because arbitration is a way to avoid costly litigation and to secure the prompt settlement of disputes, or so the courts say. In short, arbitration is favored because, in theory at least, it is a faster, less expensive way to resolve disputes.
Arbitration’s Prominence
In furtherance of that public policy, the courts and legislatures have crafted rules supporting arbitration. For example, under the so-called “positive assurance” test, any doubts concerning whether an arbitration agreement covers a particular dispute must be resolved in favor of arbitration. And, once a party is in arbitration, the rules regarding discovery and evidence are designed to make the process of conducting hearings move more quickly and less expensively than a court trial. Also, once the arbitrator issues an award and the prevailing party moves to confirm it in court, court rules generally state that such motions shall be considered on an expedited basis. Finally, judicial review of arbitration awards for errors of both law and fact is extremely circumscribed. Thus, it is very difficult, although not impossible, to vacate an arbitration award.
On their face, these rules clearly favor arbitration as a faster, less expensive alternative to traditional litigation. However, the question is whether these rules, when applied to arbitration in the real world, provide a business with a positive alternative to litigation. As noted, recent experiences have caused me to question whether the real-world costs of arbitration outweigh the benefits.
First, the arbitration process can be very expensive and time consuming, notwithstanding rules designed to streamline the process. Several colleagues were recently involved in a commercial construction arbitration that consumed nearly forty days of hearings. Because the parties had agreed to a panel of arbitrators, scheduling hearing dates that worked for all of the arbitrators, the parties and the witnesses was extremely difficult. It took more than two years to complete the hearings.
Second, although court rules require motions to confirm an arbitration award be considered on an expedited basis, my experience is that courts consider them no faster than the hundreds of other motions that are filed every day.
Third, although the limited judicial review of arbitration awards means that a motion to confirm an arbitration award will almost always be granted, the time and expense of getting to that ultimate favorable outcome can be very expensive. A party challenging an arbitration award can avail itself of the full panoply of appellate rights available to regular litigants, including appeals to the state Supreme Court. That means it can literally take several years, and tens, if not hundreds, of thousands of dollars in attorneys’ fees, before an arbitration award is finally confirmed.
Wild Times
Fourth, at least two recent court decisions in Connecticut reached conclusions that, in my opinion, may turn arbitration into more of a “wild west” than it already is, thereby creating strong disincentives for agreeing to arbitrate disputes. One decision held that arbitrators are not bound by a fundamental legal doctrine known as “claim preclusion.” Simply put, claim preclusion prevents a party from relitigating the same dispute over and over. According to the recent decision, however, arbitrators are not bound by the doctrine unless the parties expressly agree in advance to be bound. The decision seriously calls into question the finality of arbitration awards.
In the other case involving an attorney who filed an arbitration seeking unpaid legal fees from a former client, the court upheld an arbitration award that ordered the attorney to refund some of the fees already paid, even though the client had never asked for a refund. It is one thing to favor arbitration, but quite another thing to confirm an award that grants a form of relief that was never even requested.
In sum, the benefits of arbitration look great on paper. In reality, the costs are readily apparent. When faced with a legal dispute, should a business still consider arbitration? Absolutely, but only after giving serious thought to the real word consequences of that decision.
Daniel J. Klau is an attorney in the Hartford-based business law firm of Pepe & Hazard LLP. This column is offered for informational purposes only, and is not legal advice. E-mail editor@hbjournal.com to suggest a question.
