Arbitrating Commercial Disputes in the United States: Some observations and suggestions
By Greg Schuetz
An expert witness, with whom I regularly worked when defending automotive product liability cases, had a standard answer when asked how a manufacturer should have designed a particular vehicle. “Tell me what the accident will be,” he would say, “then I’ll tell you how to design the car to protect its occupants.”
I am reminded of this clever response whenever my client asks if he or she should choose arbitration or litigation to resolve future commercial disputes with a prospective US business partner. “Tell me what the likely dispute will be,” I am tempted to respond, “then I will tell you how to draft the contract to give us the best chance to win.” Unfortunately, we cannot always predict how things might go wrong in a business relationship. When they do, there is no one-size-fits-all approach to resolving the inevitable disagreements. Typically, companies mandate arbitration as the preferred and most cost-effective method for resolving cross-border business disputes with other companies. But sometimes, a client’s legal position might be better protected by a lawsuit in a US court with full discovery and the possibility of a jury trial, e.g., if the client is the plaintiff and the other side has not simply breached the contract, but has acted fraudulently or egregiously.
So which option – arbitration or litigation – should a multinational negotiating a contract with an American company choose? And if arbitration, what form should it take?
Arbitrate, don’t litigate
Arbitration advocates have long pointed to several benefits that render it superior to litigation, at least in theory: speed; cost; fairness; accuracy; confidentiality; control and predictability.
All of these are worthy goals. This is especially true in the United States, given those aspects of the US legal system that frequently receive criticism, often justified, abroad. By agreeing to litigate in the United States, a foreign company exposes itself to a litany of unintended consequences, including (i) novel causes of action that can convert simple contract breaches into fraud claims, (ii) wide-ranging pretrial discovery, (iii) complex motion practice, (iv) unpredictable and sometimes unreasonable jury awards and, depending on the state, punitive damages.
Given the inherent risks and uncertainties of the US legal system, I normally recommend that my clients based outside the United States include mandatory arbitration clauses in their contracts with American business partners.
But arbitration is not a panacea that, once invoked, automatically makes a US dispute quicker, cheaper and easier to resolve. American arbitrators are usually American litigators, and not surprisingly, they tend to view those qualities of the US legal system to which the rest of the world objects as virtues, not vices. Moreover, the lawyers representing the parties are typically American as well. Small wonder, therefore, that US-style arbitration increasingly resembles US litigation, complete with aggressive pleadings, extensive document exchanges, long witness depositions and regular appeals from unfavorable awards.
For the lawyer, the challenge is to draft a clause that promotes the positive goals of arbitration without inviting the negative aspects of litigation.
Arbitrating in the United States: practice tips and thoughts
Here are ten observations and suggestions – some standard; some contrarian – from an American litigator, who has spent much of the past 15 years representing companies based outside the United States.
1. Try to specify an international arbitral institution based outside the United States. This decreases, but does not eliminate the risk of “hometown bias” favoring the other side. International Chamber of Commerce (ICC) is always an option, albeit an expensive one. But depending on where your client is domiciled, there are many other sound choices, e.g., in Europe, one might consider London Court of International Arbitration (LCIA) or Stockholm Chamber of Commerce (SCC). In Asia, Singapore International Arbitration Centre (SIAC) is increasingly popular and, as of November 5, 2014, has adopted a promising “Arb-Med-Arb” procedure in conjunction with the newly created Singapore International Mediation Centre (SIMC). Dubai International Arbitration Centre (DIAC) is an option in the Middle East. There are other good choices – be creative.
2. If an international forum is not possible, stick to an established US domestic institution offering administered arbitration. The three main US domestic arbitral forums – American Arbitration Association (AAA), JAMS and International Institute for Conflict Prevention & Resolution (CPR) – have similar rules and are generally acceptable. Avoid ad hoc, or non-administered arbitration for complex international disputes. While less expensive, ad hoc arbitration does not offer the benefit of an established institution to guide the process, with accepted rules. Ad hoc arbitration works best for smaller domestic disputes.
3. Keep the arbitration clause simple. Do not try to account for all possibilities. The purposes of the clause are simple: (1) agree to arbitrate, (2) designate a forum and applicable rules, (3) select a seat for the hearing, (4) define the number of arbitrators and an appointment method and (5) choose a language. A good default practice is to use the standard clauses recommended by the arbitral forum you choose.
4. Regardless of the forum, the most important decision is selecting the individual arbitrator(s). Remember, people decide cases, not institutions. Like an American trial lawyer selecting a jury, get to know the people who will decide your client’s fate. Do your due diligence and assert control over the arbitrator selection process. In a three-arbitrator panel, the most critical decision is selecting the presiding neutral chair. Allowing the forum to select the neutral, other than to resolve an impasse, cedes control. Do not mindlessly delegate this decision to the two party nominees without party input. The arbitration clause should instead empower the parties themselves to try to agree on a neutral. To extent permitted by forum and ethical rules, speak with candidates about their arbitration philosophy. What do they think about discovery? How do they view dispositive motions? Does a party-nominated arbitrator feel obliged to advocate the views of the party that nominated him or her, or does he or she remain neutral and objective?
5. Consider specifying a single arbitrator for smaller disputes, e.g., if the amount reasonably in dispute is less than a certain amount, say $250,000. AAA Rules specify three arbitrators only if more than $1 million is at stake. Remember, cost and time both increase greatly when using a panel of three arbitrators. In a dispute that revolves around technical questions that an industry expert may be best qualified to answer, you may also consider using a non-lawyer as a sole arbitrator. This should reduce cost further.
6. Consider expedited procedures and express discovery limits, e.g., AAA and JAMS offer Expedited Procedures that require an award within 60 and 150 days, respectively, after filing. Another way to cut time and cost is to restrict discovery, e.g., JAMS Streamlined Rules, limit the number, time and scope of depositions. Even better, do not agree to depositions at all. The recently revised (as of October 2013) AAA Commercial Arbitration Rules closely follow the influential International Bar Association (IBA) Rules on the Taking of Evidence in International Arbitration by limiting the scope of discovery to:
- “Narrow and specific” requests for documents or categories of documents that are
- “Relevant to the case and material to its outcome” and
- Are not in the “possession, custody or control” of the requesting party.
AAA Rule 22(b); IBA Art. 3(3). Be cautious, though: in large, complex commercial disputes, AAA rules allow depositions, albeit only “in exceptional cases…upon good cause shown and consistent with the expedited nature of arbitration.” AAA Rule L-3(f). When in doubt, specify the IBA Rules. Do not agree to apply the US Federal Rules of Civil Procedure, which allow liberal discovery – document requests, interrogatories, depositions and requests for admission – into relevant matters that may lead to admissible evidence. Fed. R. Civ. P. 26(b)(1). Notably, the Federal Rules have no materiality requirement.
7. Don’t forget the choice of law, which can affect the result far more than the dispute forum. Suggest your client’s local law. If your negotiating partner requires US law, insist on applying the law of a neutral US state, preferably one that does not allow for punitive damages. Research different state laws and how they may apply to your client and the specific contract.
8. Don’t automatically mandate mediation as a precursor to filing an arbitration demand or lawsuit. This is not a criticism of mediation – I have successfully used it to resolve hundreds of disputes. But while it may be a good idea to require an initial senior manager meeting to attempt resolution before filing an arbitration demand, complicated escalation clauses with mandatory mediation frequently waste time and do not accomplish much. More importantly, the parties can always agree to mediate even in the absence of a specific authorizing clause.
9. A right to appeal sounds good to a lawyer, but it adds time, increases expenses and undermines finality. AAA, JAMS and CPR all offer optional appeals rules. Be skeptical about agreeing to them. There may be circumstances in which getting the absolute correct result is so critical that appellate rights must be preserved, but frankly, they are relatively rare. More often, your client’s best business interests are served by foregoing an appeal, which can also be used by your opponent to undermine an award favoring your client. By its nature, the decision to arbitrate reflects a willingness to accept a less-than-perfect result in order to put an end to the dispute more quickly. As the saying goes, do not let the perfect become the enemy of the good.
10. Remember – more process does not mean more justice. This is anathema to many US litigators, who reflect the prevailing American legal ethos that equates procedural due process with just results. But in my experience, more process – broad discovery, detailed motion practice, expansive appeal rights, etc. – simply increases cost and complexity without necessarily engendering better results.
Lawyers, especially American ones, are competitive by nature, and when faced with a controversy, they want to fight, and they fight to win. In my experience, however, client companies view things differently. They want to win, but not necessarily at the cost of an existing and otherwise salvageable business relationship. Given the choice between (i) a unequivocal, hard-fought litigation “win” that takes five years, a contentious public trial and an appeal to achieve and (ii) a less successful, compromise resolution that brings finality to a dispute in 12 to 18 months in a private fashion, most companies would choose the latter.
Arbitration, properly managed and controlled, offers an efficient way to resolve a dispute without unnecessarily damaging the underlying business relationship. It therefore remains particularly well suited for resolving cross-border commercial disagreements between business partners.