Arbitration Clauses: To Include or Not to Include

This article addresses several considerations companies should evaluate before including an arbitration clause in a contract.  

Usually quicker resolution than a court proceeding. One of the potential benefits of arbitration is the speed in which a decision is rendered after a claim is filed. In a court proceeding, motion practice, discovery, and various other scheduling matters can cause a seemingly innocuous cause of action to extend for years. In contrast, once an arbitrator or panel is selected, arbitration proceeds relatively rapidly and can even be completed within one year. 

Ability to select arbitrator with specialized knowledge. Through contract, parties are able to specify the particular experience of the arbitrators. For example, if the contract pertains to real estate valuation, the contract could specify that any dispute will be conducted before a set of three arbitrators with at least fifteen years of real estate valuation experience. In contrast, a court proceeding will be before a judge with general knowledge in a wide array of topics but likely not unique to real estate valuation. 

Private. Unlike court proceedings which are conducted in public, an arbitration is entirely private. Moreover, the public has a “right” to the information used in a proceeding. In contrast, the public does not have any “right” to any information disclosed or used in an arbitration. 

Straightforward rules of evidence and procedure. State and federal court rules of procedure and evidence are daunting, exhaustive, and can be time-consuming to review and follow. Such rules do not apply in arbitration, and arbitration rules of procedure and evidence are much more straightforward than their judicial counterparts. 

Certainty and finality. Under most circumstances, arbitration awards are final and binding on the parties. They can be enforced judicially by a petition to confirm the award. See Ariz. Rev. Stat. § 12-1511. The grounds upon which a court can overrule a decision by the arbitrator are extremely limited and include undisclosed bias or conflict of interest on the part of the arbitrator, an error in the calculation of the award that is apparent from the face of the award itself, or a manifest disregard of the law. See Ariz. Rev. Stat. § 12-1512(A). Moreover, if an issue could have been raised during an arbitration, it will not qualify as a reason to overturn the award. See Nolan v. Kenner, 226 Ariz. 459, 462 (Ct. App. 2011) (“Rejecting an arbitration award on grounds that could have been presented in arbitration is inconsistent with Arizona’s policy of preserving arbitration as a speedy and inexpensive mechanism for dispute resolution.”). As a result, once the arbitrator issues an award, the parties are generally bound by the terms.

No longer more cost efficient. One of the reasons arbitration used to be an attractive alternative to formal court proceedings was its relative low cost. This has changed in recent years. Now, some arbitrators charge upwards of $3,000 per day per hearing, which is multiplied by three if a panel is involved. Moreover, according to a typical fee schedule with the American Arbitration Association (“AAA”), a case worth $500,001.00 has a $5,000 filing fee along with a $6,200 final fee. Add to that the arbitrator’s fees and other administrative costs and the expense for litigating through arbitration far exceeds doing so in a court proceeding which, in the Maricopa County Superior Court, has an initial filing fee of $319. 

Extremely difficult to appeal. Although finality in an arbitration decision is a benefit to the victor, the result is bleak for the losing party. As set forth above, arbitration awards generally will not be overturned or modified absent a clear error or bias on behalf of the arbitrator. Thus, for losing parties who believe an arbitrator’s decision and award are erroneous, the prospect of overturning the award is unlikely. 

Often inconsistent or arbitrary. While courts are required to follow precedent to ensure consistent rulings, there is no legal requirement that arbitrators follow the law or render a decision based solely on the evidence before it. Although most arbitrators work hard to deliver fair decisions, arbitrators are relatively free to fashion any relief they deem falls within the bounds of the arbitration agreement and, thus, often resort to “splitting the baby in half.”

No right to jury. Unlike court proceedings where a litigant has the right to a trial before his or her peers, an arbitration will be conducted before a single or panel of arbitrators.  

The rules of evidence and procedure do not apply. Although the simplicity of an arbitration’s procedural and evidentiary rules can be a cost-benefit, it could also be a detriment as the opposing party will likely be able to introduce any evidence it wishes. Moreover, unlike in court proceedings which have strict disclosure and discovery guidelines, in arbitrations, evidence can appear for the first time on the eve of the hearing or even at the hearing itself.  

Lack of transparency and discovery. The right to engage in discovery (take depositions, issue interrogatories, request documents, and issue subpoenas) is often limited and sometimes non-existent due to the fact that arbitration is a private matter that falls outside of the traditional court system. As a general rule, discovery is not available to the parties unless they have provided for discovery in the arbitration contract or later agree to conduct discovery. Similarly, dispositive motions are often not permitted in arbitration unless the party can show that it is likely to prevail on the motion.

Ultimately, whether to include an arbitration clause in a business contract is highly fact-intensive and should be decided after reviewing the relevant circumstances. The two most important factors have historically been time and money, but with the costs of arbitration surging to all-time high levels, consideration of other factors is crucial.