The potential benefits of arbitration as an alternative to litigation are well-known. Simpler. Faster. Cheaper. Or so conventional wisdom goes. Over the last decade, however, arbitration has become less the little brother of litigation and more its twin—even if only fraternal rather than identical. In that evolution, the perceived benefits of arbitration have become more and more elusive. What happened? In the answer to that question lies a path towards restoring arbitration to its traditional role as a true alternative to litigation, and not a mere look-alike.
Much of the blame for this “litigization” of arbitration lies in the proliferation of e-discovery or, more accurately, the propagation of electronic documents, which in turn spawned the proliferation of e-discovery. Ever since Zubulake v. UBS Warburg, 217 F.R.D. 309 (S.D.N.Y. 2003) and its progeny, the results obtained in litigation have become increasingly driven not necessarily by the merits of a dispute but rather by litigation over the litigation process itself: the adequacy of litigation holds (particularly when it comes to electronic documents, which by their very nature are ephemeral), spoliation motions (with electronic documents taking center stage), and the sanctions such motions can produce (if not case-dispositive, often case-determinative). It is little wonder that the obsession with e-discovery—along with its attendant delay and expense—has made the leap to arbitration, which had already started to show smaller signs of stress. Given those hairline fractures, the rather rapid onset of e-discovery may simply have found a by-then vulnerable victim.
This hopscotching of litigation-as-an-end-in-itself to the arbitration arena has not been without its enablers: Parties who understandably want—and deserve—zealous representation. Litigators who understandably operate within their comfort zone by doing what they do best—which is, after all, litigate. Arbitrators who understandably let the parties and counsel “do their thing.” Arbitration rules which understandably allow parties, counsel, and arbitrators broad discretion in shaping an arbitration’s contours. Arbitration agreements which—not quite as understandably—allow, and even encourage, all of the above.
And therein lies the solution. Most often, arbitration clauses—especially pre-dispute arbitration clauses—are an afterthought. One side or the other’s stock language is simply accepted (or in rare cases tweaked) without any consideration of what it all means if the underlying transaction or arrangement goes south—because it won’t, right?
As a result, key issues which directly impact the cost and complexity of arbitration go unaddressed: The identity of the arbitration provider. The number of arbitrators. The manner of their selection. The location of the arbitration. The extent of, and limitations on, discovery. While some of these considerations may be addressed by the rules of any arbitration provider that the arbitration agreement actually identifies, often those rules go unexamined—and thus become a “default” set of rules which may or may not be suitable for any particular dispute.
Compounding the problem is that the full range of any potential future disputes often cannot be foreseen at the outset of a transaction. The preferable process for a $1,000 dispute, for example, may not be the preferable process for a dispute over the termination of a valuable business relationship.
The fact of the matter is, however, that the arbitration agreement itself often presents the only, or at least the best, opportunity to chart the parties’ course in the event of a dispute. This is especially so when arbitration is agreed to only post-dispute, after the precise contours of a controversy are known. And while there may be opportunities to figure out ways to tailor arbitration to a particular dispute once arbitration has been commenced, after horns have been locked and battle lines drawn is hardly the ideal time to be seeking consensus on things. What is more, a customized arbitration agreement (as distinguished from something canned) allows for almost limitless variability in paving the way for a sensible and proportionate arbitration process.
So, how does a practitioner help ensure that arbitration does what it’s supposed to? The steps are rather simple, but do require discipline—and at least some recognition that there may indeed someday be trouble in paradise:
(1) Treat the arbitration agreement or clause like the material contract term it is. While it is tempting to treat arbitration provisions as “boilerplate,” they are anything but. Indeed, the specifics of the arbitration process have a high capacity to affect the outcome of a case—or at least dictate whether the arbitration is in fact simpler, faster, and cheaper, as was intended all along.
(2) Mindfully select the arbitration provider and actually—and carefully—consider its rules. The good news is that there is a host of arbitration providers, each with its own set of rules, from which you can choose. The bad news is that there is a host of arbitration providers, each with its own set of rules, from which you can choose. Even among the “nationally recognized” providers, their rules vary considerably from one to another (and some providers even offer more than one set of rules). And don’t agree to a particular provider just because you’ve heard of it—review its rules, including its fee schedule, and critically consider whether or not they’re appropriate for your circumstances.
(3) Modify the arbitration provider’s rules if warranted. Do you think interrogatories are useless and should be forbidden? Is it absolutely critical that you have depositions, or should their number and length be limited? Do you agree that e-discovery can too readily take on a life of its own? All these procedural items, and more, can be addressed in an arbitration clause.
(4) Consider the spectrum of disputes likely to arise and tailor the arbitration process accordingly. Again, predicting the variety of disputes which might arise requires at least some level of admission that a dispute could arise—which is often the last thing anybody has in mind when a “deal” is being made. But denying the possibility doesn’t make it go away. And it doesn’t necessarily take a crystal ball to envision the range of disputes which might arise in a relationship and assess whether they all require the same sort of arbitration. For example, do disputes about individual constituent purchase orders really require three arbitrators to decide and extensive discovery (thereby delaying resolution and driving up costs), or should such enhanced arbitration be reserved for controversies only over a certain dollar threshold or involving some critical aspect of the relationship itself? Since most arbitration provisions apply to some variant of “any dispute or controversy arising out of or relating to” the agreement in which they are found, care must be taken so that the justifiably more robust arbitration process that is perhaps warranted for a “worst case” dispute does not hamper the resolution of the “most likely” one. Like most other things in arbitration—or, for that matter, litigation—it all comes down to proportionality.
(5) If all else fails, appeal to reason. If it turns out that the arbitration provision you (or someone else) drafted does not suit the dispute-at-hand, all is not lost. Most courts and court rules (including New York’s) place obligations on counsel to—as the very first rule of the Federal Rules of Civil Procedure puts it—”secure the just, speedy, and inexpensive determination of every action and proceeding.” Arbitration should be no different and, in fact, the call to be “just, speedy, and inexpensive” should resonate even more loudly in arbitration given its historical underpinnings as having been created and designed for that very purpose. Sometimes all it takes to place an arbitration on the right track is a well-placed word to a like-minded opponent or sympathetic—indeed, duty-bound—arbitrator.
Of course, nothing can guarantee that your arbitration won’t be “litigized” if that’s what both sides really want and the arbitrator(s) allow(s). By following these steps, however, you can at least help make sure that it doesn’t happen unwittingly.
Mitchell Banas is a litigation partner at Bond, Schoeneck & King.