As seen in the August issue of
For The Defense published by
DRI - The Voice of the Defense Bar.
Arbitration emerged as a mainstream form of dispute resolution
because many litigants were fed up with the cost and time of
traditional litigation. Parties saw arbitration as an efficient,
cost-effective alternative to litigation, and flocked to it like a
cure-all elixir. The litigants, however - undoubtedly used to ways
of traditional litigation - brought along with them much of
litigation's baggage. This baggage, including extended
discovery and motion practice, long hearings, and frequent appeals
left arbitration bloated and slowly transformed it from
cost-efficient and speedy to expensive, slow and frustrating.
Now, many parties and attorneys alike are retreating from
arbitration. These parties are either reverting back to litigation
or searching for other forms of dispute resolution. Mary Swanton,
System Slowdown: Can arbitration be fixed?, Inside
Counsel, (May 1, 2007). In fact, many parties –
especially companies – are removing mandatory arbitration
language from underlying business and employment contracts. Id. The
parties who are jumping ship are doing so mainly because of a
perception of high costs and time.
We need to realize that the model of arbitration, in and of itself,
is not the source of the problems currently associated with it.
Rather, the problems associated with arbitration – namely
high costs – emanate from litigants' use of the
arbitration process. Because parties have treated arbitration like
litigation, the arbitration process has manifested itself into
something analogous to litigation.
In the current economy, cost-effective methods of resolving
disputes are at the forefront of client concerns. Simply put, now,
more than ever, parties are looking for ways to cut costs. This
article briefly discusses the primary reasons for the increasing
cost of arbitration and gives several cost-saving techniques
parties can utilize to avoid pitfalls that have made arbitration so
expensive while still achieving its inherently attractive
qualities, such as flexibility, confidentiality and the use of
expertise in decision making.
Reasons Why Arbitration Costs Are Rising
Understanding the reasons why costs have risen requires an
explanation of the factors that make up arbitration's costs.
Arbitration costs are broken down into three primary components: 1)
administration costs; 2) arbitrators' fees (arbitrators'
rates times the amount of time spent officiating the controversy);
and 3) costs of litigation – which includes
attorney's fees. Christopher Drahozal, Arbitration Costs
and Forum Accessibility: Empirical Evidence, 41 U. Mich. J. L.
Reform 813, 816 (2007-2008). Administration costs and
arbitrators' rates have remained relatively constant throughout
the recent years. Discovery, motion practice, and appeals have
become increasingly similar to ordinary litigation. Because of
this, costs of arbitrators' overall fees and litigation
expenses have risen, increasing costs for all parties and reducing
or eliminating traditional savings.
Administration costs are the fees parties must pay to have their
dispute heard by an arbitration association. Similar to a filing
fee in state or federal court, parties to arbitration must pay to
have a claim heard by an arbitration organization. Administrative
costs are typically based upon a sliding scale dependant upon the
amount in controversy. Currently, administration fees for
commercial arbitrations range from a fee of $975 for claims less
than $10,000 to a fee of $18,600 for claims greater than
$10,000,000. See Am. Arbitration Ass'n Commercial Arbitration
Rules and Mediation Procedures (amended and effective January 1,
2010).
Little evidence exists suggesting that administrative fees have
risen in recent years. Commercial arbitration administrative fees
levied by the American Arbitration Association have not increased
since September 1, 2007. Am. Arbitration Ass'n Commercial
Arbitration Rules and Mediation Procedures (amended and effective
Sept. 1, 2007)). In fact, many arbitration organizations, including
the American Arbitration Association, have instituted procedures
that decrease administration fees if parties settle the matter
before proceeding to the final evidentiary hearing. Am. Arbitration
Ass'n Commercial Arbitration Rules and Mediation Procedures
(amended and effective January 1, 2010).
The second cost of arbitration is the arbitrator's fee. Unlike
courts, arbitrators charge fees, usually on an hourly or daily
basis, to hear and rule on litigants' disputes. In 2001, the
American Arbitration Association conducted a series of surveys of
its member commercial arbitrators. Christopher Drahozal,
Arbitration Costs and Forum Accessibility: Empirical
Evidence, 41 U. Mich. J. L. Reform 813, 820 (2007-2008). The
survey revealed that commercial arbitrators' fees ranged from
$600 per day to $5,000 per day. Id. The mean fee per day for
commercial arbitrators was slightly less than $1,500 while the
median was slightly more than $1,500. Id. No evidence exists that
arbitrators' hourly or daily fees have increased in the recent
years. The overall costs of arbitrators' fees, however, have
drastically risen due to increased discovery and longer
hearings.
Litigation expenses are the primary reason why arbitration expenses
have increased in recent years. Initially, parties to arbitration
have the expense of enforcing the underlying arbitration clause in
court to allow the controversy to proceed to arbitration. Jonathan
Wilson, former general counsel for Interland, Inc., stated that his
company invested "'more than a year's worth of time
and substantial legal fees simply to enforce in court our right not
to have to go to court.'" Lou Whitman,
Arbitration's Fall From Grace, Law.com, July
13, 2006. In fact, from 2005 through 2007, courts across the
country published more than five hundred opinions regarding the
enforceability of mandatory arbitration clauses. See
Joseph Daly & Suzanne Scheller, Strengthening Arbitration
By Facing Its Challenges, 28 QLR 67 (2009). Courts
overwhelmingly enforce mandatory arbitration clauses. See
Arnold v. Arnold Corp. 920 F.2d 1269, 1281 (6th Cir. 1990)
(the court upheld a decision granting the defendants' motion to
compel arbitration holding that courts are to examine the
arbitration language in a contract in light of the strong federal
policy in favor of arbitration); Kruse v. AFLAC, 458 F.
Supp.2d 375 (E.D. Ky. 2006) (the court granted the defendant's
motion to compel arbitration pursuant to a binding arbitration
clause in an underlying contract, finding that "[i]t is
well-settled that the courts should enforce private agreements to
resolve disputes by mandatory binding arbitration and any
ambiguities or doubts should be resolved in favor of
arbitration"). The problem, however, lies in the fact that the
parties have to go through the time and expense of litigating the
right to have the controversy arbitrated before proceeding to
arbitration.
Litigation expenses are also increasing because the arbitration
process has become more analogous to a lawsuit. To a greater
extent, parties operating under standard arbitration rules are
engaging in extended discovery and motion practice. Thomas
Stipanowich, Arbitration: The "New Litigation,"
2010 U. Ill. L. Rev. 6 (2010). Moreover, hearings are much longer
because the parties and the arbitrator are attempting to avoid
subsequent vacatur due to perceived procedural injustices.
Id. These traditional courtroom practices are increasing
time and cost in a dramatic fashion. Id.
Methods Parties May Utilize to Lessen Costs Associated With
Arbitrations
The increased costs of arbitration combined with current economy
have litigants scrambling to find ways to save money. Enlisting
some or all of the following techniques may help litigants to save
money (and time) while retaining the qualities anticipated and
expected of arbitration. Prior to arbitration, parties should
consider voluntary or involuntary mediation. Upon commencement of
arbitration, the parties should consider engaging in a scheduling
conference and submitting to an ensuing scheduling order. Finally,
during arbitration, the parties should consider limiting discovery,
providing for the ability to file dispositive motions, limiting the
amount of time spent at the hearing of the case and prospectively
agreeing to limit the appealability of the arbitration award. These
techniques will be considered in order.
1. Engage in Pre-Arbitration Mediation with an
Independent Mediator
Parties can reduce arbitration costs by engaging in mediation prior
to the arbitration hearing. Settling prior to an arbitration
hearing will save the parties the fees and expenses associated with
the hearing, which can be substantial. Mediation often leads to
settlement because it requires the parties to think about the
additional costs and risks associated with not settling and allows
the parties a forum in which to present their cases. Don Peters,
Just Say No: Minimizing Limited Authority Negotiating In
Court-Mandated Mediation, 8 PEPP. DISP. RESOL. L.J. 273, 275
(2008). Mediation can also narrow the scope of issues to be
arbitrated.
Mediation can either be voluntary or involuntary. See
Jacqueline Nolan-Haley, Mediation Exceptionality, 78
FORDHAM L. REV. 1247, 1253-1255 (2009). Parties can voluntarily
engage in mediation at any time. Indeed, such voluntary action is
encouraged, since it can lead to the cost savings discussed above.
In fact, many in-house counsel prefer mediation over arbitration.
Leslie A. Gordon, Clause for Alarm, 92 ABA J. 19, 19
(2006). Issues can arise, however, when the parties do not wish to
engage in mediation. Depending on the specific factual situation,
involuntary mediation may be appropriate.
Parties can be forced to participate in mediation in one of two
ways. First, the underlying contract that requires the parties to
arbitrate can also require the parties to mediate before the
arbitration hearing. For the drafting attorney who wishes to reduce
expenses, this requirement should be seriously considered. Second,
the arbitrator can order the parties to mediate, similar to the way
that many state and federal court judges require mediation prior to
trial. See Will Pryor, Alternative Dispute
Resolution, 61 SMU L. REV. 519, 524 (2008). Before ordering
the parties to mediate, however, the arbitrator should consider the
specific circumstances of the case. If one or both parties have
expressed a complete unwillingness to settle, mediation may be a
waste of everyone's time and money. On the other hand, if both
parties are willing to mediate, the parties are more likely to
settle the case.
Regardless of how the case ultimately ends up in mediation, it is
vital that the mediator is completely independent from the
arbitrator(s) assigned to the case. A key component to successfully
mediating a case is the ability of the parties to be fully candid
with the mediator. Kimberlee K. Kovach, New Wine Requires New
Wineskins: Transforming Lawyer Ethics For Effective Representation
in a Non-Adversarial Approach to Problem Solving: Mediation,
28 FORDHAM URBAN L.J. 935, 952 (2001). If a party knows that the
mediator will later judge the case on the merits, a party may be
less likely to be completely truthful with the mediator. See
id. Moreover, an arbitrator who also serves as a mediator may
later be subject to disqualification from the case due to an
ethical conflict. See Robert H. Smit, Effective
Advocacy, Efficient Proceedings and Ethics in International
Arbitration, 704 PLI/Lit 471, 508 (2004).
In sum, engaging in mediation can decrease the cost of the
arbitration process by fostering an early resolution to contested
claims or narrowing the issues argued at the arbitration hearing.
Mediation, however, is not appropriate in all cases, and parties
and arbitrators should consider the specific circumstances of the
case at issue before deciding that mediation is proper.
2. Impose A Mandatory Scheduling Conference And
Resulting Scheduling Order
Parties to arbitration should consider submitting to a scheduling
conference and resulting scheduling order. Similar to scheduling
conferences in state or federal court, arbitration scheduling
conferences are used by arbitrator(s) to impose discovery limits
and deadlines, limits on motion practice, and hearing dates and
lengths. Frequently, in proceedings that are either complex or
involve a large amount in controversy, the governing rules mandate
that parties must submit to some form of a scheduling conference.
See American Arbitration Association's Commercial
Arbitration Rules, Procedures for Large, Complex Commercial
Disputes, L-3 (June 1, 2009). Even in the absence of a mandatory
scheduling conference, parties should still consider submitting to
a scheduling conference because of the certainty such conferences
and orders bring.
Scheduling conferences offer many implicit benefits to litigants.
Initially, scheduling conferences can give parties a strategic
advantage in the arbitration. Scheduling conferences inherently
allow parties to ascertain impressions of the opposition's
ability or willingness to mediate some or all of their claims.
Scheduling conferences also provide a chance for parties to
determine the issues of key importance to the other side. With this
information, parties can better gauge the costs, risks, and time of
the arbitration. Additionally, scheduling conferences are a chance
for litigants to argue for the need of cost saving tactics such as
limited discovery and motion practice, and limited evidentiary
hearings.
Scheduling orders also offer many benefits to litigants. Scheduling
orders impose a plan upon which the parties can rely upon and for
which they can budget by assisting counsel in preparing reasonable
estimates on the cost of discovery, motion practice, evidentiary
hearings, and appeals. With the scheduling order, counsel can more
accurately provide clients with information on the costs of the
case. Such information is also useful in determining the need for
mediation. Though scheduling orders in isolation may not create any
savings, at the very least scheduling orders are useful, because
they provide certainty upon which the parties may rely and
budget.
3. Place Limits on Discovery
In recent years, the cost of arbitration has increased due to
increased pre-hearing discovery. See Thomas J.
Stipanowich, Arbitration: The "New Litigation",
2010 U. Ill. L. Rev. 1, 12 (2010). Unfortunately, attorneys,
clients, and arbitrators favor and often foster more extensive
discovery. See id. at 13. Attorneys and clients promote
extensive discovery because it is similar to the discovery allowed
in traditional court-based litigation. Attorneys and clients also
favor extensive discovery because of the hopes that additional
discovery will help their individual case. Id. Arbitrators
compound the problem. Many arbitrators are reluctant to limit
discovery due to the potential for reversal and the desire to
placate the parties in hopes of obtaining future appointments.
Id.
Despite the general unwillingness of the participants to limit
discovery, given the high costs of discovery, such limits are an
excellent way to save costs for all parties. Indeed, according to a
1999 federal court newsletter, document discovery accounts for
fifty percent of litigation costs in the average case.
Administrative Office of the United States Courts, The Third
Branch, Judicial Conference Adopts Rules Changes, Confronts
Projected Budget Shortfalls (Oct. 1999). In cases in which
discovery is "actively used", it can account for up to
ninety percent of litigation costs. Id. Of course,
discovery cannot be entirely eliminated; rather, the parties to
arbitration must agree on a standard for discovery. The question
then becomes what standard is applicable. Fortunately, a number of
standards are available to parties to choose from, though each
standard gives the arbitrator a great deal of discretion.
The American Arbitration Association ("AAA") Commercial
Arbitration Rules provide that the arbitrator, "consistent
with the expedited nature of arbitration," may order the
production of documents and other information. AAA Commercial
Arbitration Rule 21(a). Notably, "[t]he arbitrator is
authorized to resolve any disputes concerning the exchange of
information." Id. at 21(c). The AAA Procedures for
Large, Complex Commercial Disputes provide that "[t]he parties
may conduct such discovery as may be agreed to by all the parties
provided, [but] the arbitrator(s) may place such limitations on the
conduct of such discovery as the arbitrator(s) shall deem
appropriate." AAA Procedures for Large, Complex Commercial
Disputes, Rule L-4(c).
Other arbitration standards provide for similar discovery
procedures. For example, the Revised Uniform Arbitration Act
provides that "[a]n arbitrator may permit such discovery as
the arbitrator decides is appropriate in the circumstances, taking
into account the needs of the parties to the arbitration proceeding
and other affected persons and the desirability of making the
proceeding fair, expeditious, and cost effective." Revised
Uniform Arbitration Act, § 17(c). Rules promulgated by JAMS
allow parties to take one deposition and require parties to produce
documents and witnesses that support their claims and defenses.
JAMS Comprehensive Arbitration Rules, §§ 17(a)-(b). The
arbitrator has the authority to settle any discovery disputes that
may arise. Id. at § 17(d).
Clearly, the litigants and arbitrators have broad discretion in
determining the appropriate amount of discovery for any given case.
Therefore, the key to limiting discovery, and thereby reducing
costs, in a commercial arbitration is twofold. First, the parties
should agree to the scope of discoverable materials prior to
beginning arbitration. Of course, each case is different, and it is
impossible to fashion a hard-and-fast rule regarding what should be
discoverable in every case. JAMS, however, has created a list of
relevant factors for consideration by arbitrators in determining
the scope of discovery. See JAMS Recommended Arbitration
Discovery Protocols for Domestic, Commercial Cases. Parties to
arbitration can use this list, which includes factors such as the
nature of the dispute, the relevance and reasonable need for the
requested discovery, and the characteristics and needs of the
parties, to come to an agreement on the scope of discovery. See
id. Second, the parties should choose an arbitrator who is not
hesitant to limit discovery. Simply put, an arbitrator who is
willing to limit discovery can save the parties' time and money
without affecting the fairness of the proceedings. Notably, an
arbitrator should not limit discovery because of a fear of
reversal, since an arbitrator's decision to limit discovery is
overwhelmingly upheld on appeal. See Rintin Corp., S.A. v.
Domar, ltd., 374 F. Supp.2d 1165 (S.D. Fla. 2005); Lummus
Global Amazonas S.A. v. Aguaytia Energy del Peru S.R. Ltda.,
256 F. Supp.2d 594 (S.D. Tex. 2002).
The costs of extended discovery can greatly increase the total cost
of arbitration. By agreeing to limited discovery and choosing an
arbitrator who will not order extended discovery, parties can save
both time and money.
4. Consider Dispositive Motions
Parties can decrease both the time and cost of arbitrations by
utilizing dispositive motions. The ability to file and argue
dispositive motions allow parties to obtain complete or partial
resolution of issues without utilizing a full evidentiary hearing.
Parties to arbitration, however, rarely utilize dispositive
motions.
Many litigants are not aware that dispositive motions are available
at arbitration. An associate general counsel for a multi-national
corporation remarked that his company decided to take arbitration
clauses out of its employment contracts. Leslie A. Gordon,
Clause for Alarm, A.B.A. J., Nov. 2006, at 19. He cited
lack of the ability to file dispositive motions as a primary reason
for the change. Id. The general counsel was dissatisfied
with arbitration because, in his words, "'[y]ou still have
to hire outside counsel, so you're not saving a lot of money.
Plus, arbitration is missing a key tool for defendants: the
possibility of summary judgment.'" Id. Under the
current rules, however, parties may file dispositive motions.
Recently, several arbitration organizations, recognizing the
potential utility of dispositive motions, have provided for them in
procedural rules. A number of arbitration rules explicitly allow
arbitrators to hear and rule on dispositive motions. For example,
Section 15(b) of the Revised Uniform Arbitration Act specifically
grants an arbitrator authority to hear dispositive motions:
An arbitrator may decide a request for summary disposition of a
claim or particular issue: 1) if all interested parties agree; or
2) upon request of one party to the arbitration proceedings if that
party gives notice to all other parties to the proceeding, and the
other parties have a reasonable opportunity to respond.
Similarly, JAMS, a nationwide arbitration organization, allows for
summary disposition. In its latest set of comprehensive arbitration
rules, JAMS vests the arbitrator with the ability to grant either
partial or total dispositive motions. JAMS Rule 18 states that
"[t]he arbitrator may permit any Party to file a Motion for
Summary Disposition of a particular claim or issue, either by
agreement of all interested Parties or at the request of one Party,
provided other interested Parties have reasonable notice to respond
to the request." JAMS, The Resolution Experts, Comprehensive
Arbitration Rules & Procedures, Rule 18 (July 15, 2009).
Other sets of arbitration rules, although not specifically
addressing dispositive motions, impliedly allow arbitrators to hear
and rule on dispositive motions. The American Arbitration
Association's Employment Rule 39(d) provides, in pertinent
part, that the arbitrator "may grant any remedy or relief that
would have been available to the parties had the matter been heard
in court ..." Combining AAA Employment Rule 39(d) with Fed. R.
Civ. P. 56(b) – the Rule allowing parties to move for
summary judgment – permits arbitrators to grant a total
or partial motion for summary judgment.
Additionally, Rule 30 (b) of the American Arbitration Association
Commercial Arbitration Rules authorizes arbitrators to conduct
proceedings expeditiously, and to focus the parties'
presentations on dispositive issues:
The arbitrator, exercising his or her discretion, shall conduct the
proceedings with a view to expediting the resolution of the dispute
and may direct the order of proof, bifurcate proceedings and direct
the parties to focus their presentations on issues the decision of
which could dispose of all or part of the case.
Therefore, the arbitrator arguably has the authority to hear and
rule on dispositive motions because he or she has the ability to
conduct the hearing in such a way to hear and dispose of the issues
expeditiously.
Moreover, courts from several jurisdictions have upheld
arbitrators' ability to grant dispositive motions, even in the
absence of a rule explicitly allowing such activity. See
Louisiana D. Brown 1992 Irrevocable Trust v. Peabody Coal Co.,
20 SF.3d 1340 2000 WL 178554, at *5-6 (6th Cir. Feb. 8, 2000)
(upholding an arbitrator's award granting the defendant's
dispositive motion before the arbitrator allowed the parties to
conduct any discovery); Intercarbon Bermuda, Ltd. V. Caltex
Trading and Transport Corp., 146 F.R.D. 64, 72 (S.D.N.Y. 1993)
(upholding that the arbitrator's decision to rule on
documentary evidence alone without hearing live testimony did not
provide a basis for vacating the award); Hamilton v. Sirius
Satellite Radio, Inc., 375 F. Supp.2d 269, 278 (S.D.N.Y. 2005)
(upholding the arbitration panel's order granting Sirius
Radio's motion for summary judgment).
While courts are inclined to approve such awards, parties should
bolster the arbitrators' ability to hear such motions by
prospectively granting the arbitrators authority. If the
arbitration is based on an underlying contractual agreement, there
are two ways to ensure the arbitrators hearing the claim will be
able to rule on such motions without fear of possible vacatur.
Initially, a drafter can include the power of an arbitrator to hear
dispositive motions in the underlying contract. However, due to
size constraints, such specific provisions may not be
practical.
Alternatively, a drafter can incorporate into the underlying
contract an entire set of rules – such as the Revised
Uniform Arbitration Act's procedural rules - that explicitly
permits the arbitrators to hear and decide dispositive motions. An
adoption of an entire set of rules will allow the drafting party to
ensure favorable procedure, while conserving the contract's
limited space. An en masse adoption of an entire set of rules,
however, has a potential to have negative effects. A drafter must
be mindful of all rules in a particular set, because all will be
adopted by such a procedure. Therefore, a drafter should proceed
cautiously, analyzing all possible effects, before adopting an
entire set of rules.
If the arbitration is not based upon an underlying contract, or if
the underlying contract does not explicitly grant the arbitrator
authority to rule on dispositive motions, parties can allow for
dispositive motions when planning their scheduling orders. Many
rules provide for mandatory scheduling orders. Alternatively,
parties can independently choose to incorporate scheduling orders
into their individual arbitration. In these situations, parties can
agree that the arbitrators will have explicit authority to hear and
rule on dispositive motions. The problem parties may encounter
(defendants, in particular), is that the adverse party may not
agree to allow for such motions, especially if such agreement could
potentially result in a portion of their claim being
dismissed.
In conclusion, a summary judgment hearing is almost invariably
shorter, simpler, and less cumbersome than a full-scale evidentiary
hearing, and most rules either explicitly or implicitly grant the
arbitrators with authority to rule on such motions. To avoid
appeals, however, such authority should be explicitly granted
either by reference or by wholesale adoption of an underlying set
of rules that grants such authority. Also, if not included in an
underlying contract, a scheduling order is a convenient way for
parties to vest with the arbitrators such power, if all parties
will agree.
5. Impose Limits on the Amount of Time Spent In the
Evidentiary Hearing
The time spent in a hearing constitutes the lion's share of the
expenses as they relate to the arbitrators' fees. As a matter
of fact, the evidentiary hearing constitutes up to sixty percent of
the fees in the average arbitration. Moreover, many arbitrators are
unwilling to shorten hearings, due to a financial stake in
extending the proceedings, and the higher probability of a
successful challenge to an arbitration award based upon an
abbreviated proceeding. See Mary Swanton, System Slowdown:
Can arbitration be fixed?, Inside Counsel, (May 1,
2007).
Parties may shorten hearings in a number of ways. The initial and
most obvious way to shorten the hearing is to limit, by agreement,
the number of days spent in the evidentiary hearing. Additionally,
parties may stipulate to facts and address witness objections
before the hearing by filing motions in limine. Another
less obvious way to limit the amount of time spent in the hearing
is to place limits on post-hearing briefing. Such briefing is
usually a rehashing of the facts and arguments presented at the
hearing, which adds little value to the proceedings at a high cost.
Finally, parties can consider more extensive pre-hearing briefs.
Pre-hearing briefs that fully develop the issues of the case allow
the arbitrator(s) to make a more informed decision with less time
spent in the hearing.
Shortening the evidentiary hearing certainly leads to immediate
savings in costs. With the average arbitrator costing more than
$1,500 per day, any limiting of the time period can result in vast
savings, especially on panels with multiple arbitrators.
See Christopher Drahozal, Arbitration Costs and Forum
Accessibility: Empirical Evidence, 41 U. Mich. J. L. Reform
813, 820 (2007-2008). This technique, however, must be weighed
against the need of a party to present its case, and it is
therefore not applicable to all situations.
6. Place Limits On The Appealability Of The Arbitration
Award
Under the Federal Arbitration Act, a court must affirm an
arbitration award unless the award is vacated, modified, or
corrected. 9 U.S.C. § 9. According to the Act, a court may
only vacate an award based on corruption or fraud in obtaining the
award, evident partiality or corruption by the arbitrator,
prejudicial misconduct by the arbitrator, or an award that exceeded
the arbitrator's authority. Id. at § 10. Courts
have added "complete irrationality" and "manifest
disregard of the law" as additional grounds for vacatur.
Joseph L. Daly & Suzanne M. Scheller, Strengthening
Arbitration by Facing its Challenges, 38 QUINNIPIAC L. REV.
67, 84 (2009); see also Gas Aggregation Servs., Inc. v. Howard
Avista Energy, LLC, 319 F.3d 1060, 1065 (8th Cir. 2003));
Hoffman v. Cargill, Inc., 268 F.3d 458, 461 (8th Cir.
2003). Courts may only modify or correct arbitration awards when
there was an evident miscalculation or mistake in the award, when
the arbitrator makes an award based on a matter not submitted, or
when "the award is imperfect in matter of form not affecting
the merits of the controversy." 9 U.S.C. § 11.
Although review is seemingly limited under the Federal Arbitration
Act, parties often appeal arbitration awards, even though such
appeals are rarely successful. Stephen A. Hochman, Judicial
Review To Correct Arbitral Error – An Option To
Consider, 13 OHIO ST. J. ON DISP. RESOL. 103, 110 (1997). The
appeal process reduces or even eliminates the cost savings
traditionally associated with arbitration. See id. Thus,
if parties can contractually limit the ability to appeal adverse
arbitration awards, the parties can potentially save money by
reducing appellate litigation costs. Further, such limits on
appealability may also encourage settlement, since parties who know
that appellate review is limited may be less willing to allow the
arbitrator to decide the case on the merits. There is authority to
indicate that such contractual limits on appealability are
enforceable.
In Van Duren v. Rzasa-Ormes, the plaintiff and defendant
were originally partners in a business venture. 926 A.2d 372, 374
(N.J. Sup. Ct. 2007). After a dispute arose, the parties executed a
"Binding Arbitration Agreement" that stated that the
arbitration award was "not subject to an appeal to any
authority in any forum. Id. at 374-375. The plaintiff
sought to confirm the arbitrator's ultimate award, and the
defendant cross-moved for vacatur. Id. at 376. The trial
court confirmed the award for reasons unrelated to the
appealability clause, and the defendant appealed. Id. at
377. The Superior Court of New Jersey held that an agreement
limiting appealability is enforceable when entered into by two
parties of equal bargaining power, but only to the extent that the
agreement does not preclude all judicial review. Id. at
381. Because the trial court did review the award despite the
appealability clause, the defendant obtained meaningful judicial
review. Id. The clause therefore operated to bar the
appellate court from reviewing the award, and the court dismissed
the appeal. Id. at 382. Other courts have ruled in accord
with Van Duren and enforced clauses limiting the ability
to appeal arbitration awards. See, e.g., MACTEC, Inc. v.
Gorelick, 427 F.3d 821, 830 (10th Cir. 2005).
In sum, arbitration awards are seemingly difficult to appeal, but
parties are frequently required to litigate such appeals. By
contractually limiting the scope of judicial review, parties may
save time and money.
Conclusion
Attorneys' fees and other litigation expenses have increased
the costs of arbitration dramatically. For arbitration to remain a
viable alternative to actual lawsuits, these costs will have to be
substantially reduced.
Among the possibilities for reducing arbitration costs are early
voluntary and involuntary mediation; carefully designed scheduling
orders and early scheduling conferences; strict limits on discovery
– either agreed upon by the parties or imposed by the
arbitrators; the use of dispositive motions; shortened evidentiary
hearings; and prospective limits on appeal. Only through the use of
these and other devices for cost reduction and simplification will
the use of arbitration continue to be an effective tool for parties
and their counsel.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.