January 01, 2015

Arbitration from the Perspective of an Advocate

Deborah A. Coleman

Arbitration can give your client a fair hearing, but it is not just litigation with a private judge. There are distinctive features of arbitration that you must understand to handle an arbitration case effectively for your client.

Must You Arbitrate?

Arbitration clauses are widely used and generally enforced, even when the parties had unequal bargaining power or the clause appears in a form contract. Although some consumer contracts offer a small claims court alternative to arbitration, binding arbitration is usually the exclusive method of dispute resolution provided for specific disputes.

To avoid mandatory arbitration for your client’s dispute, you would have to prove (1) that your client did not agree to arbitration; (2) that the dispute is outside the scope of the arbitration agreement; or (3) that legal grounds exist upon which the arbitration agreement can be revoked or not enforced, such as unconscionability, coercion, or illegality. Lawyers who have challenged arbitration clauses on one of these grounds have occasional victories, but they are rare. Through a series of decisions favoring arbitration, the U.S. Supreme Court has substantially narrowed the grounds on which an arbitration agreement can be found invalid. (See, e.g., American Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013), in which the class waiver in the arbitration clause was found enforceable although the cost of individual arbitration of statutory claims exceeded possible recovery.) Similarly, federal statutes or regulations limiting arbitration are being narrowly construed. (See, e.g., Seney v. Rent-a-Center, 738 F.3d 631 (4th Cir. 2013), which found that FTC regulations prohibiting pre-dispute arbitration agreements in consumer warranties did not apply to lease transactions.)

The Clause Is King

The arbitration agreement is the most fundamental law of the arbitration. It will determine what disputes can be arbitrated and should state how the arbitrator will be chosen, where the hearing will be held, and what the procedures will be. (This article assumes that the client’s arbitration clause covers the basics for a domestic arbitration, and that it is enforceable.) Read the agreement carefully at the outset, and refer to it as needed.

An arbitrator’s subject matter jurisdiction derives from the parties’ arbitration agreement. A clause that applies only to claims “arising from this contract” will not vest the arbitrator with power to hear tort or statutory claims. For the arbitrator to hear such claims, the clause must be drawn more broadly. Counterclaims can be made in the arbitration only to the extent that they are within the scope of the arbitrator’s jurisdiction. If the arbitration clause is narrow, or unclear, you may be litigating in two forums, at least until a court decides that all of the issues are arbitrable.

The arbitration clause should state whether or not the arbitration will be administered (e.g., by the American Arbitration Association, or AAA) and what procedural rules govern the proceeding. The clause may also identify which arbitration law—the Federal Arbitration Act (FAA) or state arbitration law—applies to your case. All arbitration statutes share common elements, but they vary from jurisdiction to jurisdiction. Even between federal circuit courts, interpretations vary in ways that can affect, for example, your ability to get pre-hearing discovery from a non-party, as discussed below.

Many arbitration providers have created rules for class actions in arbitration. However, if the arbitration clause contains a class action waiver, it will be enforced, even if a class action is the only practical way to pursue your client’s claim.

The arbitrator’s power with respect to remedies may be broader than that of a court, or considerably narrower. For example, Rule 47 of the AAA’s Commercial Arbitration Rules (2013) permits the arbitrator, unless otherwise agreed, to award “any relief or remedy that the arbitrator deems just and equitable and within the scope of the agreement of the parties.” In contrast, Rule 44 of the AAA’s Consumer Arbitration Rules (2014) limits relief to that which a court could order. By agreement, the parties may narrow the arbitrator’s discretion in fashioning relief. For example, the arbitration agreement itself may deprive the arbitrator of authority to award consequential or punitive damages.

Choose the Arbitrator Well

Parties almost always get to choose their arbitrator, a welcome corollary to the obligation to pay for her services. Use that privilege wisely. If the clause (or the parties’ post-dispute arbitration agreement) requires that the arbitrator have specific qualifications, the parties can insist that any candidate have these attributes. In any event, counsel can use the selection power to increase the likelihood that the arbitration will be well managed and fairly and efficiently decided. Inform yourself about your arbitrator candidate’s training, experience, and management style. An arbitrator with a track record or specialized training in effective case management will check unnecessary discovery and wasteful motion practice. If you choose an arbitrator who knows the industry in which the dispute arises, or the technology that is at issue, your client will not have to incur the cost of presenting the contextual or primer evidence that a jury trial would require.

In small-stakes administered arbitration, the arbitrator may be appointed by the administrator. Arbitration agreements that require a panel of three often call for each party to appoint one arbitrator and for the two arbitrators to select the third. All three must be neutral unless the parties have agreed otherwise.

Arbitrators are required to disclose any circumstance that might give rise to justifiable doubt about their independence or impartiality, and this duty to disclose continues through the proceeding. California and some other states require certain very specific disclosures. Carefully review the disclosures that your arbitrator candidate makes, and follow up on any point of uncertainty. Accepting the arbitrator notwithstanding her disclosures is a waiver of any downstream complaint about a circumstance that the arbitrator discloses. Although traditionally the burden of disclosure is entirely on the arbitrator, some recent cases have suggested that a party cannot obtain vacatur based on publicly available information, and some arbitration rules now require a party to disclose any knowledge it has of facts that may cause someone reasonably to doubt the arbitrator’s impartiality. (See, e.g., AAA Commercial Arbitration Rules (2013), Rule 17(a).)

Exploit the Opportunities of Arbitration

Arbitration can truly be a cost-effective alternative to litigation, but only if counsel treat it that way. Parties may make their submissions on papers or at a hearing. Increasingly, the parties’ presentations may be made through an online dispute resolution service.

In arbitration proceedings with a right to hearing, an experienced arbitrator convenes the parties before the hearing to agree to a case-management plan addressing discovery and the hearing. The planned time and effort should be proportional to the amount in controversy. For a simple low-stakes matter, the case-management order may simply set the hearing date and require the parties to identify their witnesses and exchange their exhibits before the hearing. Once a schedule is in place, the arbitrator will press the parties to stick to it unless there is good cause not to.

Arbitration rules rarely contemplate wide-open discovery and even more rarely anticipate motion practice. Arbitration rules vest the arbitrator with substantial authority to control both. Consider this an advantage—a good arbitrator will allow only that discovery that is reasonably needed for the parties to present their cases at hearing and will allow only motions that hold substantial promise to resolve part of the case as a matter of law.

Arbitration hearings can be structured to maximize efficiency and reduce costs. If the parties agree or the arbitrator orders, decisive issues can be heard first, the hearing can be convened on-site to permit the arbitrator directly to observe a physical location, structure, or large machine, or Internet-based conferencing can be used to receive the testimony of a witness halfway around the world. In order to limit experts’ testimony (and time) to matters genuinely in dispute, expert reports can be submitted as their direct, and the arbitrator may require that opposing experts meet before the hearing and isolate their points of disagreement or call opposing experts to take the stand at the same time and answer the same question one after the other. Any means to focus and advance the hearing and decision may be used if the parties agree or the arbitrator orders it.

Understand the Limitations of Arbitration

There are several significant ways in which your options are inherently more constrained under arbitration than they are in a court litigation.

Because arbitral jurisdiction is created by contract, joinder practice is very different than it is in court. To join a non-signatory in an arbitration proceeding requires a legal theory accepted by the applicable arbitration law and substantive law (e.g., alter ego, intended beneficiary, or intertwined claims). An unwilling non-signatory may demand that the joinder issue be decided by a court rather than the arbitrator.

Arbitrators’ subpoena power is territorially limited by the governing arbitration law, and in some jurisdictions their subpoena power is limited to compelling testimony or production of evidence at the hearing, as opposed to pre-hearing discovery. Sometimes there is a way around these limitations. For example, by parties’ agreement or by the power of an arbitration rule such as the International Institute for Conflict Prevention & Resolution’s Rule 9.5 for Non-Administered Arbitration (2007), the arbitrator can convene the hearing early, where the witness is located, in order to take her testimony. To enforce an arbitrator’s subpoena, one must seek the aid of the court in the jurisdiction where the arbitration is to be held.

Once an award is made, the arbitrator cannot reconsider it. The standard for court review is strict. The power of an arbitrator who has issued a final award is deemed exhausted and is limited to correcting clerical errors and the like and to addressing omitted issues. The award of an arbitrator that is complete and draws its essence from the parties’ contract cannot be vacated unless the challenger establishes the arbitrator’s evident partiality, corruption, or misconduct, or that the arbitrator exceeded his powers or so imperfectly exercised them that a mutual, final, and definite award on the matter submitted was not made.

Despite U.S. Supreme Court rulings that suggest otherwise, some jurisdictions still hold that an award made in manifest disregard of the law may be vacated. However, mere error does not suffice, and review on these grounds requires a sufficient record. (See Physicians Insurance Capital v. Praesidium Alliance Group, 2014 WL 1388835 (6th Cir. April 10, 2014), which held that the court will vacate where a decision flies in the face of clearly established legal precedent, but that without a transcript or reasoned award, review is impossible.)

Don’t Get Too Casual

It is refreshing to try your case to a knowledgeable arbitrator in the relatively relaxed atmosphere of a conference room. Theatrics are unnecessary—and discouraged. But muster the best quality evidence and law that will support findings in your favor. As noted, an arbitrator’s award is final and binding in a way that a verdict or even a trial court judgment is not.

If circumstances prevent you from bringing the best evidence to the hearing, bring what you can. The rules of evidence do not apply in arbitration, and evidence that may be inadmissible in court may be accepted “for what it’s worth.” Although an arbitrator may not find hearsay evidence persuasive, it may be better than nothing, especially if it addresses a necessary element of your claim in a low-stakes matter.

Be aware that arbitrators often have greater power to make a fee-shifting award than judges do. Under many current arbitration rules, the arbitrator may make a fee-shifting award if both parties demand it, as well as when such an award is expressly authorized by the agreement or by law. Thus, if you demand attorney fees in your claim, and the respondent’s counsel demands them in his response, as advocates routinely do in court pleadings, your client could face an award of attorney fees by virtue of these reciprocal demands alone, even on a simple contract case.

In addition, arbitrators must allocate the costs of the arbitration, unless the parties have agreed to bear these costs equally. The arbitrator’s fees and the fees of the institutional provider, if there is one, are among the largest costs that may be shifted. Absent a contrary agreement by the parties, the arbitrator has wide discretion to shift costs and may take into account the circumstances of the case, the conduct of the parties during the proceeding, and the result of the arbitration.

You must have your award confirmed by a court in order for it to have the effect of a judgment under state law. Applicable arbitration law establishes the procedure for petitioning for confirmation of an arbitration award or for seeking vacatur, modification, or correction, and it sets time limits for these activities. For example, the FAA permits a petition to confirm to be brought within a year of the award, but a petition to vacate, modify, or correct must be filed and served within three months.

Arbitration may not be your preferred forum, but it can be a means to getting a fair and efficient hearing of your client’s dispute. With an understanding of arbitration’s features, benefits, and limitations, you can be a more effective advocate for your client.


Deborah A. Coleman

Deborah A. Coleman is an arbitrator, mediator, and professional ethics counselor and advocate based in Cleveland, Ohio.