Arbitration Clauses in Business Agreements - The Dark Side

I used to believe, naïvely perhaps, that arbitration was a sensible way to resolve business disputes. I bought into the hype that arbitration would be resolved more quickly and in a more cost-effective manner than traditional litigation. I was also impressed by the promise that so-called experts would be resolving the cases rather than judges with little experience in the issues.

I have come to learn that the opposite is true. In two recent matters which affected my clients, arbitration proved to be the worst of all worlds. And I am apparently not alone, as I have spoken to many other attorneys with similar experiences and read about still more.

As for cost, the cases proved to be far more expensive than traditional litigation. After all, my clients were paying for their own attorneys, but also paying one half of the cost of the arbitrator -- himself a highly paid attorney. In the traditional courtroom setting, the judge is paid by the taxpayers.

The matters were not resolved any faster, either. The parties were still able to present endless motions and propound considerable discovery which forced the matters to drag out for many months. And the arbitrator is paid his fees every step of the way.

Finally, and perhaps worst of all, the decision-makers clearly had no grasp of the issues and their importance. Decisions were made that overlooked substantial and material facts and misapplied the law, leaving my clients in a far worse position than had they been in court. At least in court, when a decision goes this far awry, the parties may have the option to take an appeal and ask for another look by a second set of judges. And while the appeals courts are typically compelled to accept the facts as found by the trial court, they are nevertheless equipped to insure that the law was applied correctly in light of those factual findings. If nothing else, the threat of a reversal through an appeal can drive parties to a settlement that they might not otherwise achieve. In arbitration, the arbitrator's decision is final and there are virtually no grounds for appeal, no matter how bizarre and idiosyncratic might be the decision.

This is not to say that I would forgo arbitration in all instances. I still believe there is a place for arbitration, particularly for partners in a business who are situated on relatively equal footing. But aside from this very limited circumstance, I am hard-pressed to believe that there is any benefit to arbitration. And while both parties face the risk of an unjust decision, all sense of fairness seems to be lost. In my view, arbitration and arbitrary are really one and the same.