United States: Why Arbitration? Why Not?

Last Updated: October 27 2014
Article by Douglas J. Shoemaker

In negotiating and drafting agreements for maritime and energy transactions, the parties inevitably consider whether and, if so, how to define the process for dispute resolution. With respect to "blue-water" charterparties, arbitration is fairly common. However, in other agreements, such as master service, supply, purchase and sale, bunkering, towing, stevedoring, and terminal agreements, among many others, it appears the parties more often agree to litigation in a particular court or city or the contracts are silent with respect to dispute resolution.

So, why aren't parties to other maritime and energy-related transactions considering arbitration? The purpose of this article is to examine the most common arguments for and against arbitration as well as weigh the pros and cons.

I admit at the outset that I am generally a proponent of arbitration with respect to contractual disputes. My experience includes both domestic and international arbitrations under a variety of rules, including the Society of Maritime Arbitrators ("SMA"), London Maritime Arbitrators Association ("LMAA"), American Arbitration Association ("AAA"), and JAMS (formerly "Judicial Arbitration and Mediation Service"). Recently, we have participated in several arbitrations under the rules of the Houston Maritime Arbitration Association ("HMAA").1 Our experience with the HMAA and SMA has been particularly good.

In 21 years of contract negotiations, I have heard the usual arguments against arbitration. Interestingly, what may be a reason against arbitration for one person may well be a reason in favor of arbitration for another. Also, in some cases, a party may be adamantly opposed to arbitration, but either the reasoning is based on inaccurate information, or the specific issue could be resolved by simply revising the arbitration provision. Stated well by the U.S. Supreme Court, arbitration "is a matter of consent, not coercion."2 The parties are generally free to structure their arbitration agreements as they see fit.

Efficiency v. Cost of Arbitrators

One of the most important considerations for any commercial party is that arbitration is (or should be) more efficient than litigation. In my experience, arbitrations are quicker and less costly than litigation. While it is true that the parties must pay for the arbitrators' time, this is offset by the streamlined process. Subject to the circumstances of the case, discovery is substantially limited in arbitrations as compared with litigation, and there is usually less need for expert witnesses since the arbitrators generally have expertise in the industry. The briefing and hearing schedule is usually flexible depending on the circumstances and, if unforeseen issues arise, it is usually easier to set up a hearing with arbitrators than fitting in a court's often full docket.

But is arbitration really faster than litigation? Generally, arbitrations in the U.S. are completed in less time than it would have taken to get to trial. According to the 2013 "Slowpoke Report" put out by Texas Lawyer, of the 24 federal judges in the Southern District of Texas, 17 had cases pending over three years. According to data provided by the AAA, the average time from filing to award in commercial arbitration is approximately 7.9 months. Under SMA rules, an arbitrator or panel must render an opinion within 120 days following the close of proceedings. Under the HMAA Rules, the arbitrators must render a written award within 30 days following the hearing or post-hearing memoranda, or within 60 days if a reasoned award is requested. The parties can agree to an additional 30 days, if necessary. According to the HMAA, large cases generally take 6 months from start to finish. Although it depends on the circumstances of the dispute, this is generally consistent with my experience. The last arbitration we participated in under HMAA rules took 6 months and 20 days. Had we filed the case in federal court, we would likely have just started depositions by that time.

Further, most arbitration rules provide for shortened procedures. Often, an arbitration provision will call for application of the shortened procedures for disputes below a certain threshold value. Under the SMA Rules for Shortened Arbitration Proceedings, the matter is heard by a sole arbitrator on documents only, the award will be issued within 30 days after the proceedings close, and the arbitrator's fee will not exceed $3,500 (or $4,500 if there is a counterclaim). HMAA rules similarly provide for "Fast Track Arbitration" for claims below $100,000, and, not to be outdone, the LMAA offers Intermediate Claims Procedure, Small Claims Procedure, and Fast and Low Cost Arbitration ("FALCA") rules.

Notwithstanding the relatively limited discovery and streamlined briefing and hearing process, it is axiomatic that arbitration will be less time consuming (and thus less costly) than litigation because arbitration eliminates or limits most evidentiary issues and activities particular to trial, such as voir dire and preparation of the jury charge or findings of fact and conclusions of law. Because attorney fees are generally the most significant cost in dispute resolution, it follows that a shorter process will result in less cost. Also, in considering the relative cost of litigation versus arbitration, parties often overlook the internal business cost in lost productivity while key employees are engaged in the discovery or trial processes.

Limited Discovery

The relatively limited discovery allowed under arbitration proceedings can be a double-edged sword. Some parties may look to this as a benefit of arbitration, while others may view this as a clear deficit. But, if you have ever drafted responses to voluminous requests for production or sat through depositions running on for hours, you will appreciate that discovery is one of the more costly aspects of litigation. The Federal Rules of Civil Procedure and the similar state court rules generally allow for very broad discovery via interrogatories, requests for production, and depositions. Clients from other countries often have a very difficult time understanding the broad scope of discovery permitted in the U.S. courts. While the federal rules and some states have imposed limitations on the scope of discovery, it is often left to the discretion of the judge.

Certainly, in some cases, extensive discovery is entirely appropriate and necessary. Although limited discovery is the general rule of arbitration, this is always subject to agreement of the parties and is ultimately subject to the discretion of the arbitrators. We have been involved in arbitrations where there has been significant written discovery and numerous depositions. Assuming the parties have selected qualified arbitrators, it is hard to argue that a party will be less likely to obtain the requisite information in arbitration as opposed to litigation.

Fact Finder with Industry Expertise v. Potential for Partiality

As discussed earlier, it would seem that having an arbitrator with experience in the industry at issue in a commercial dispute would benefit both parties. However, we have had many instances where parties refuse to accept an arbitration provision based on their belief that the potential for partiality may be greater with an arbitration panel than with a judge or jury.

While certain state and federal judges in Houston are well experienced in the maritime and energy industry, it is rare to find jurors that have such an understanding. In these particular areas, an understanding of the industry is crucial for the fact finder. For this reason, when maritime and energy cases do go to trial, extensive expert testimony is almost always required. In our experience, having a case before a federal judge who is well-versed in maritime law and familiar with the maritime industry generally results in a more efficient process and an appropriate result that is less likely to be appealed. However, in jurisdictions like Houston, where there are 11 federal district court judges and 24 state civil district court judges, the cases are assigned randomly. As Forrest Gump would say, "Life is like a box of chocolates. You never know what you are going to get." In a commercial setting, it would appear the parties are better served having some control over the fact finder's selection.

As many arbitrations call for a three arbitrator panel, wherein one arbitrator is selected by each party, and the third is chosen by the two so selected, assuming you have chosen a qualified arbitrator, who in turn selects a qualified arbitrator, it would seem the risk of partiality is substantially diminished. Further, under SMA rules, Section 9, prior to any hearing or submissions, the arbitrators must disclose all close personal ties and business relations with any one of: (a) the parties to the arbitration; (b) other affiliates or associated companies of the parties; (c) counsel for the parties; and (d) the other arbitrators on the panel. Thereafter, the parties may accept or reject the panel. Similarly, under HMAA rule 4.3.1, within 21 days after contact for possible appointment, an arbitrator must disclose to the parties any information that might cause the person's impartiality or independence to be questioned. Rule 4.3.2 requires subsequent disclosure throughout the arbitration proceedings. As discussed later, one of the bases for vacating an arbitration award is where evident partiality exists.

As in some states, where state court judges are elected and often spend time raising funds for those elections, or in smaller towns where opposing counsel visits with the judge about recent hunting and fishing trips, it is often difficult to explain to clients that partiality is not an issue. In my experience, the protections afforded to parties with respect to partiality of the fact finder are as good as or better in arbitration when compared to litigation.

Confidentiality v. Lack of Transparency

When a lawsuit is filed in state or federal court, the pleadings become part of the public record, subject only to an order from the court placing the documents under seal. If the case goes to trial, those proceedings will usually be open to the public and any resulting opinion will generally be posted electronically. In some circumstances, this transparency is an important and necessary aspect of dispute resolution. However, in commercial contract disputes, it is more likely the parties would prefer to maintain confidentiality, particularly if sensitive commercial terms are at issue. Unlike litigation, arbitrations are not conducted publicly, and the result may or may not be confidential depending on the agreement of the parties and/or the arbitration rules to be applied.

While the SMA generally publishes arbitration awards, the HMAA makes a point to maintain confidentiality. HMAA President Thomas Damsgaard told TradeWinds, "When you have commercial contracts, they are private and confidential. They are not public. So we are maintaining the privacy and confidentiality throughout the entire contractual period, including into the arbitrations scenarios, too." Parties favoring the SMA may prefer the ability to research previous awards concerning a particular issue, arbitrator, or arbitrators. Whether the parties choose to maintain confidentiality may depend on the nature of the contract or dispute. Under either HMAA or SMA rules, the parties can agree to maintain or give up confidentiality. In litigation, on the other hand, every aspect of the judicial process is open to public scrutiny, with limited exceptions.

Finality v. Limited Review

Parties often refuse to accept an arbitration provision because they feel the process for appeal or review is insufficient. While limited, both the Federal Arbitration Act3 ("FAA") and the Texas Arbitration Act4 ("TAA") provide for judicial review of arbitration awards. The grounds for vacating an arbitration award under the FAA or TAA are substantially the same:

  1. where the award was procured by corruption, fraud, or undue means;
  2. where there was evident partiality or corruption in the arbitrator(s);
  3. where the arbitrator(s) were guilty of misconduct, such as refusing to hear material evidence; or
  4. where the arbitrators exceeded their powers.5

Further, the Texas Supreme Court has ruled that under the TAA, the parties are permitted to contractually agree to expanded judicial review of arbitration awards.6 Other parties recognize the benefit of a process that has finality, such that the parties can get on with their business, which presumably does not focus on litigating or arbitrating disputes.

Flexibility v. No Set Process

Unlike litigation, where the procedures are set out in generic rules and the hearing and trial schedules must fit into the court's busy calendar, arbitration allows flexibility in its process as well as the result. Arbitration procedures can usually be specifically tailored to the circumstances. Arbitration hearings can often be set to fit the schedules and convenience of the parties and counsel, and minor matters can often be dealt with via telephone. Furthermore, because the parties are more directly involved in the process and because the arbitrators have expertise in the industry, the results of an arbitration are more likely to be tailored to the commercial and practical requirements of the specific dispute.

International Enforceability

Since many, if not most, maritime and energy-related transactions concern international issues and entities, arbitration is clearly favorable to litigation with respect to enforceability. Because most developed countries, including the U.S., have ratified the New York Convention, enforcement of an arbitration award is far more reliable in an international setting than litigation. The New York Convention has been ratified by 142 countries. The Convention significantly limits the grounds for challenging or refusing to enforce awards. To the contrary, civil court judgments are far more difficult to enforce across international borders.

Lagniappe

Notwithstanding everything else, although not as common as in personal injury disputes, when commercial disputes arise, we sometimes see parties who somehow feel personally aggrieved and "want their day in court." As we all know, it is more and more rare that a case actually reaches trial. Often, after extensive discovery is completed and significant costs have been incurred, the parties reach a settlement at mediation or "on the courthouse steps." With arbitration, it is more likely that the party principals will have an opportunity to be heard. With a shorter timeline, lower cost, and fewer evidentiary hurdles, witnesses in arbitrations are generally able to speak their piece. (As noted earlier, one of the few bases for vacating an award is where an arbitrator refuses to hear material evidence.) In some situations, it appears that the closer involvement of the parties in the arbitration process itself foments commercial resolution.

Conclusion

While there is no question that certain disputes are not appropriate for arbitration, generally, in the maritime and energy transaction setting, the "pros" of arbitration outweigh the "cons." Arbitration, unlike litigation, affords the parties considerable autonomy and flexibility in resolving their dispute. If the parties are careful in drafting the arbitration provision and in selecting the applicable rules or organization, and they select qualified arbitrators, arbitration can be an efficient and effective process for dispute resolution.

Footnotes

1. According to a recent article in TradeWinds, the HMAA is hearing more cases and being specified in more contracts. "Texas Arbitrators Expand Role in Dispute Resolution," by Eric Martin, May 23, 2014. We are seeing more tanker charterparties calling for arbitration in Houston under HMAA rules. This is not surprising since Houston is growing rapidly, is the hub for the U.S. energy industry, and is the home of one of the world's busiest ports.

2. Stolt–Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 681 (2010).

3. 9 U.S.C. §§ 1-16.

4. TEX. CIV. PRAC. & REM. CODE §§ 171.001-.098.

5. See 9 U.S.C. §10(a) and TEX. CIV. PRAC. & REM. CODE § 171.088(a).

6. See Nafta Traders, Inc. v. Quinn, 339 SW 3d 84 (Tex. 2011).

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.

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