Most businesses are generally familiar with arbitration, but the details of the process can sometimes be a bit murky. Whenever parties engage in arbitration, those unknown details can cause confusion and anxiety for even the most savvy litigant. To ease those concerns, the following is a series of questions and answers addressing issues commonly arising in an arbitration proceeding.
1. What exactly is arbitration, anyway?
At its most basic, arbitration is simply a private process whereby parties agree to have a neutral third-party resolve a dispute without going to court. Parties agree to utilize arbitration—and decide on the terms of the arbitration—in advance of any dispute.
Arbitration may be voluntary (meaning that, if a dispute arises, the parties still have to agree to submit that dispute to arbitration) or mandatory (meaning the parties must submit their dispute to arbitration). In addition, arbitration may be binding (the arbitrator’s decision is final) or non-binding (meaning a disappointed party may reject the arbitrator’s decision and the parties move to another forum to have their dispute resolved).
This Q&A focuses on mandatory, binding arbitration, which is the form most commonly adopted in commercial contracts.
2. What’s the point of entering into an arbitration agreement?
Arbitration may be preferable to litigation for a number of reasons, such as:
- Predictability – Parties are free to agree in advance on practically every procedural and substantive aspect of arbitration. This includes the scope of discovery, the location and timing of proceedings, and even who will serve as the arbitrator (or panel of arbitrators). In business relationships that cross jurisdictions, whether between two states or internationally, the parties can resolve complex choice-of-law disputes in advance. By deciding these matters up front, the parties greatly increase the predictability of the dispute-resolution process.
- Expediency – Traditional litigation can be a lengthy and time-consuming affair, with schedules often established by the court regardless of the preferences of the parties. However, arbitration allows the parties to consolidate or skip certain steps, establish proceeding deadlines, and obtain a resolution more quickly.
- Cost Savings – For some disputes, arbitration can offer significant cost savings. For instance, the parties can avoid fees and expenses associated with traditional discovery by limiting the scope and timing of discovery—or even choosing to forego it altogether. This characteristic can cut both ways, of course, as parties may prefer greater discovery than an arbitration agreement typically provides. In addition, the time needed for an arbitration proceeding is generally much shorter than needed for a jury trial. Lastly, parties can decide where arbitration will occur—a significant determinant of costs for long-distance business relationships.
- Privacy – Many parties prefer the private resolution of disputes that arbitration affords. A judicial proceeding, on the other hand, is typically a matter of public record.
3. How do I know whether a dispute is covered by an arbitration agreement? And what happens if we disagree about what’s covered?
There are two threshold questions to address whenever arbitration arises: First, do we have a valid agreement to arbitrate? If so, did we agree to arbitrate this dispute? These questions may appear to overlap, but there are critical distinctions in how they are approached.
In the first step, one must evaluate the validity of the arbitration agreement itself—not the entire contract. To illustrate, consider a lawsuit alleges the breach of a sales contract. The defendant moves to compel arbitration based on an arbitration clause contained within that sales contract. In considering whether to send the lawsuit to arbitration, the court will apply general principals of contract law to evaluate the validity of the arbitration clause in isolation, without regard to arguments about the enforceability of the overall sales contract. If arbitration is appropriate, the latter issue would be addressed by the arbitrator.
If you have a valid agreement to arbitrate, the second step is to determine whether the specific dispute falls within the scope of the arbitration agreement. This is often referred to as a question of arbitrability. For example, a shipping contract might contain an arbitration clause that’s limited to disputes over damages to goods during shipping. Alternatively, an expansive arbitration clause might cover “any and all disputes” between the parties.
Notably, parties can even agree to arbitrate the question of arbitrability. In other words, you can delegate to the arbitrator the decision of whether the dispute belongs in arbitration. But before a court will find the parties agreed to “arbitrate arbitrability,” it must find “clear and unmistakable” evidence that the parties intended to do so. For example, the Fourth Circuit Court of Appeals has offered the following as model language showing the requisite intent: “All disputes concerning the arbitrability of particular disputes under the contract are hereby committed to arbitration.” Other “clear and unmistakable” evidence might be the express adoption of specific arbitration rules, such as the American Arbitration Association’s rules, which vest in the arbitrator the power to determine its own jurisdiction.
4. Is arbitration expensive? Who pays?
The cost of arbitration, like litigation, depends on countless factors. However, the costs are primarily a product of the arbitrator’s fees (who may charge an hourly rate or a flat fee) and administrative costs.
Some arbitration organizations have detailed fee schedules that provide guidance on expected administrative costs. The American Arbitration Association, for example, provides two different pay schedules (“Standard” and “Flexible”), both of which have tiered costs depending on the value of the claim and other factors. Under the American Arbitration Association’s (AAA) standard fee schedule, a claim valued in the range of $500,000 to $1,000,000 would require an “initial filing fee” of $5,500 and a “final fee” of $6,825.
The arbitrator, meanwhile, typically charges an hourly rate, much like an attorney. Those hourly rates may range from $250 an hour to more than $1,000 an hour depending on the arbitrator’s expertise and the complexity of the case.
As for who is responsible for these costs, the answer generally lies in the agreement itself. The arbitration agreement may provide for one side to cover these costs, for the costs to be divided evenly, or that the losing party pays for everything.
5. Can one side waive arbitration?
Yes. Waiver most often occurs where a party pursues litigation, then later decides that arbitration would be preferable. In those circumstances, the opposing party may argue that arbitration was waived by engaging in the judicial process. But because courts strongly favor arbitration, the opposing party must show they suffered prejudice by the delay in seeking arbitration. Courts typically find these standards met where the party seeking arbitration engaged in significant discovery that was unavailable through arbitration, or where the opposing party was forced to incur significant expenses defending the litigation.
To avoid any waiver issues, it is important to make an early determination as to whether the dispute might be subject to an arbitration agreement and, if so, whether arbitration is the preferable route.
6. What happens if a lawsuit is filed despite an arbitration agreement?
Occasionally, clients will be served with a lawsuit that’s clearly subject to arbitration. When this occurs, you have two options. First, you can continue with the litigation, which as explained above, may result in a waiver of the right to arbitration. Alternatively, you can move to compel arbitration.
If the court agrees that a lawsuit is subject to arbitration, it will typically stay the litigation pending the outcome of the arbitration. That is, the lawsuit will be “paused” while the arbitration plays out, and the parties will be directed to update the court once the arbitrator renders a decision. Sometimes, the court will determine that some—but not all—of the lawsuit’s claims are subject to arbitration. In that case, the parties may be forced to proceed with arbitration on some claims while simultaneously litigating the non-arbitrable claims in court.
However, if “all of the issues presented in a lawsuit are arbitrable,” courts have held that dismissal of the lawsuit (as opposed to a stay) may be appropriate. This typically arises where the agreement delegates even the threshold question of arbitrability to the arbitrator.
7. What if I need immediate relief and can’t wait for arbitration?
One downside of arbitration is that it may not provide the full range of remedies that might be available through judicial proceedings. Occasionally, a client requires immediate relief—such as a temporary restraining order preventing a party from disseminating trade secrets or requiring a party to turn over certain equipment before it is damaged. Under those circumstances, the client simply cannot wait for an arbitrator to be selected and become authorized to act.
Fortunately, statutory provisions allow you to seek “provisional remedies” immediately and prior to the commencement of arbitration. This includes seeking a temporary restraining order, initiating a claim-and-delivery action to recover personal property, or even appointing a receiver. Moreover, the statutory provisions allow the use of those remedies without resulting in any waiver of arbitration.
8. What are my rights to appeal an arbitration decision?
It depends. As a threshold matter, a court’s order compelling arbitration and staying litigation is generally not appealable. In contrast, an order denying a motion to compel arbitration and stay litigation generally is appealable in North Carolina, because it is considered to affect a “substantial right.” The Federal Arbitration Act (“FAA”) likewise permits appeals from orders that deny arbitration but forbids appeals from orders compelling arbitration.
The arbitrator’s final decision is generally just that: final. After all, one of the main reasons parties choose arbitration is to obtain a quick and final resolution of the dispute. To that end, arbitration agreements often provide that the arbitrator’s decision is not subject to judicial review absent very limited circumstances. Under both the FAA and North Carolina’s Uniform Arbitration Act, for example, courts are limited to reviewing arbitration decisions that were clearly improper, such as those “procured by corruption, fraud, or other undue means.”
Courts, therefore, hesitate to second-guess an arbitration decision even if the arbitrator misapplied the law or misunderstood the facts. In sum, the parties are almost always stuck with the arbitration decision, whether they like it or not.
9. What happens if I win at arbitration but the other side ignores the arbitrator’s order?
After receiving a favorable decision at arbitration, you have the option to file a motion asking a court to confirm the decision and reduce it to a judgment. Once reduced to a judgment, the decision is enforceable like any other court judgment. You can take advantage of the various judicial remedies available for satisfying the judgment, which automatically attaches to certain assets.