Beware The Arbitration Clause – You May Be In For An Unpleasant Surprise.

Dave Ventker
We are on occasion presented with contracts containing arbitration agreements, or with requests from clients to include arbitration clauses in contracts we are preparing for them. There is a common belief that arbitrating disputes is cheaper and more efficient than resorting to the courts. In our experience, however, saying it doesn’t make it so.

When parties agree to submit a dispute to arbitration, they are essentially opting to hire a private judge, or panel of judges, to resolve the dispute instead of filing a lawsuit. You still need legal representation, so a trial lawyer will be at your side even if you agree to arbitration. Depending on the jurisdiction, arbitration proceedings CAN be faster than resorting to the courts; this argument is less persuasive in Virginia and North Carolina where the courts can be extremely efficient. Our experience also tells us it is highly questionable as to whether arbitration is cheaper than litigation, and the parties who agree to arbitration lose some significant tools that are available in the courts.

One fact that often comes as a surprise is the actual cost of the process, especially if done under the auspices of the American Arbitration Association. The filing fees alone can range anywhere from $995.00 to more than $75,000.00, depending on the amount at issue. Other organizations, such as the Society of Maritime Arbitrators, do not charge any fees to file a complaint in arbitration. In contrast, it costs $400.00 to file a federal lawsuit, regardless of the amount sued for. Then there is the cost of the arbitrators, who are paid by the hour. Assuming you are using a panel of three arbitrators at the rate of $400 per hour, each, you can find yourself paying $1200/hour for their services. An 8 hour hearing alone will cost $9600, not including the time the arbitrators spend reading written submissions, travel time, hotel costs, etc. Whether the parties split these fees, or are awarded the fees at the end of the arbitration process, the cost still comes as a shock to many who believed that arbitration is cheap and efficient. Not allowing for taxes, state and federal judges and juries are free.

Another feature often touted as an advantage to the arbitration process is the limited discovery that is available. In routine disputes where evidence and witnesses are exclusively in control of the parties, this can, indeed, save a substantial amount of money and inconvenience. However, you should understand that arbitrators have no legal power to subpoena witnesses or to compel production of documents from people or companies who are not parties to the case. If your strategy depends on evidence or witnesses not under your control, you may find that your ability to present a case to the arbitrators is crippled.

The last distinction that matters is that the decision of the arbitrators is final. There is no appeal. In the courts, of course, this is not true- trial court decisions are always subject to appeal to a higher court. Depending on your position, this may or may not be an advantage, but you should consider it before agreeing to arbitrate.

The one undisputed advantage arbitration does provide over litigation, and this is sometimes of paramount importance to our clients, is confidentiality. There is no public record of arbitration proceedings, and the media has no right of access to a case in arbitration.

If you agree to arbitrate, you should understand you are bound by the agreement. Generally, as a matter of federal law, an arbitration agreement deprives courts of jurisdiction over the matters covered by the clause, and though it is not unheard of, courts are generally loathe to disregard arbitration agreements. If you sign it, you’re probably stuck with it.