What is arbitration? Arbitration is a process in which parties agree by contract (typically in an arbitration clause in their sales contract or other agreements) to resolve claims and disputes before a single arbitrator or arbitration panel instead of in the court system. Arbitrators are often lawyers or retired judges, hopefully with some experience with the industry or type of dispute in question, but may also be non-lawyers with industry experience.
Why would parties want to consider arbitration? For many years, proponents of arbitration have argued that arbitration is "faster, cheaper, and better" than litigation. Is this true? In my judgment, the "faster and cheaper" claims are overrated. As practiced in the U.S., arbitration is much like a court case, which means it typically moves pretty slowly. Further, the arbitrators are paid by the hour or day, and, frankly, have little economic incentive to move things along. There is also a desire on many arbitrators' part to accommodate everyone's schedule, which can be a good thing, but also makes for slow moving proceedings. As for cost, the parties have to pay not only their lawyers, but also administrative fees to the administering organization (such as the International Chamber of Commerce or the American Arbitration Association) and their share of the often hefty fees of the arbitrators.
The real reason, I submit, to consider arbitration, is that it provides a forum in which the dispute can be decided by lawyers or industry personnel who posses the relevant experience and technical understanding, rather than by a lay jury chosen essentially at random. Further, even if the parties were to litigate before a judge, many judges lack technical or industry expertise. Many companies, particularly international companies are also concerned about the fact that many of our state court judges are popularly elected. Although, in fairness, most judges really try to make the right decision, possible local influences are reasonable concerns for an international company or a company headquartered in a different location.
Another reason to consider arbitration is that it may be possible to limit the very burdensome discovery (or information exchange) process used in U.S. court cases. Of particular concern is the relatively recent widespread use of e-discovery, or the discovery of emails and other electronically stored information. E-discovery can be highly intrusive and extremely expensive, often requiring outside vendors to manage the process.
Theoretically, the parties can agree to limit discovery in arbitration. Beware, however, that many of the administering organizations have changed their rules to be more hospitable to discovery and that the trend, at least in the U.S., seems to be toward more discovery in arbitration.
Therefore, if limiting discovery is important, it is best to negotiate those limitations in the negotiation of the arbitration clause. Beware, however, that U.S. lawyers are typically trained to believe that more discovery is better than less, so successfully negotiating a limiting provision is not a given. In fact, it is not uncommon to see arbitration clauses with a provision that specifically allows discovery "as permitted under the Federal Rules of Civil Procedure."
In considering whether to agree to arbitration, you may want arbitration if: (1) your business is an international company; (2) disputes are likely to involve technical issues; (3) disputes are likely to involve industry practices or issues that are best decided by someone with applicable knowledge; (4) your business wants to limit the costs of discovery; (5) there is a danger of a "home town" result in a lawsuit brought in a venue friendly to the opposition; or (6) your company simply does not thing the jury system makes much sense for resolving complex business disputes.
If you do agree to an arbitration clause, it is possible to specify where the arbitration will be held. For international arbitration, New York has been the venue of choice because of its prominence in international trade and its experienced bar. However, New York is also probably the most expensive venue in North America, both in terms of the fees of the lawyers and arbitrators, and the other costs, such as hotel rooms and transportation costs.
There are other excellent venues available. The Atlanta International Arbitration Society has been formed to promote Atlanta as a venue for international arbitration. The Atlanta organization is supported by major law firms in Atlanta and throughout the Southeast, governmental officials, the State Bar of Georgia, universities, and the administering organizations. Atlanta has a much lower cost structure than New York, easy international travel connections through the world's busiest airport, a sophisticated bar that deals regularly with international companies, and excellent facilities. For more information about Atlanta, click here. Miami and Houston have made similar initiatives.