United States: Arbitration 101: Why And How To Keep Your Company Out Of Court

Last Updated: April 19 2017
Article by Charles W. Allen

"Arbitration makes a lot of sense", Charles Allen states. A general commercial disputes lawyer and currently a partner at Orrick, Herrington & Sutcliffe in Hong Kong, he practices across a wide range of different things.

Human Resources magazine spoke to Allen about one of his fields of expertise: arbitration. "It's a particular area of interest to me that there seem to be so many employers around town who don't understand that arbitrating employment disputes makes a lot of sense," he shares. "Especially when you're dealing with senior employees, particularly people with complex compensation arrangements. And that's what's misunderstood I think."

To help alleviate some of the confusion, he talked us through the arguments for-, some of the inner workings of-, and HR's involvement in arbitrating employment disputes.

Q. What is the main difference between litigation and arbitration?

For me, confidentiality and expertise are the two main issues that set them apart.

Simply put, litigation is court. Your claim is heard by a judge who is a civil servant sitting in either the district court, the high court, or the labour tribunal – a specialist employment tribunal. It's heard in public and your judge may not be a specialist either in employment law or a specialist in the particular industry or sector that the dispute arises out of.

Contrast that to arbitration. Arbitration is a private form of dispute resolution and your arbitrator is somebody that the parties pay for and somebody that the parties choose. And what you can do, is choose an arbitrator who you know has got some experience in the particular industry, or somebody who might be familiar with the specific compensation arrangements that give rise to the dispute.

Additionally, arbitration is always conducted in private. So there's no washing your dirty laundry in public.

Q. You say you feel many companies in retrospect might have preferred arbitration to resolve their dispute. What do you think causes them to initially overlook it?

I can only speculate about why employers in general might not think about arbitration. One possible reason is that it's an afterthought. We all know that when commercial contracts are being drafted the dispute resolution clauses are the last to be negotiated. Because, particularly in this jurisdiction, but not limited to Asia, having a discussion about the possibility of a dispute is regarded as pretty poor form, or even unlucky.

As a result, these clauses end up being negotiated at midnight or 2 o'clock in the morning. It's not given much thought, somebody sticks in some boilerplate language and that's it.

Another possibility is that the employer makes an assumption that every dispute is going to end up in the labour tribunal anyway, and simply doesn't bother to consider the possibility of putting in an arbitration clause.

A final reason could be that they've heard somewhere that arbitration clauses in employment contracts are not enforceable. While there is some substance to this – a court is not mandated to stop court proceedings in breach of an arbitration clause – it's no reason not to put in the clause in the first place.

My thesis is that unless you put an arbitration clause in your employment contract, you don't even have the option to try and stop court proceedings once an employee has started those.

Q. So putting in an arbitration clause is mainly a safeguard for employers?

It gives the employer an option. And whether the employer decides to exercise that option may depend on the type of case.

For example, a relatively straightforward case for payment in lieu of notice after an employee misbehaved and was fired, is probably in good hands with the labour tribunal as far as the employer is concerned. It's not the company's conduct that will be under scrutiny, and the final payment, if any, is easy to calculate.

On the other hand, if there's dispute about a bonus payment to a highly compensated employee with complex bonus arrangements set out in their contract, an employer would most likely prefer the claim to be handled in arbitration.

Firstly, so that they could appoint an arbitrator who knows something about the industry. Secondly, because it keeps the whole thing out of the public eye, meaning any bonus arrangements that might for example be tied to investments made for the company can stay confidential.

Q. How would you go about finding the right arbitrator?

The idea is that both parties agree on one. If they can't agree, they can normally ask the arbitration centre to appoint someone on behalf of both parties.

You might want to go to a lawyer, a solicitor like myself, or a barrister, a retired judge, a professional arbitrator, or you might want somebody who has a deep background in HR.

The Hong Kong International Arbitration Centre maintains lists of arbitrators that you can pick from, and the website contains links to the CVs of the arbitrators so you can find one with the right professional background and experience.

Q. You mentioned arbitration is paid for by 'parties'. Could you elaborate on that?

The general rule in arbitrations is that the parties will initially split the arbitrator's fees and other costs, but the losing party will pick up all of the tab. Of course, that can be a problem in the context of employment disputes, because even highly compensated employees may not be able to afford the possibility of losing.

And so there are ways around this. The first step is to draft your clause in such a way that it doesn't go anywhere near arbitration. Ideally, you'd put in a mediation provision that has to be progressed through before you get to the point of anybody making a decision about going to court or arbitration.

Secondly, you can add provisions into your arbitration agreement that load the burden of cost onto one party, or have the winning party agree to not claim the costs back from the losing party.

Q. From an employment dispute perspective, how much legal knowledge should HR have?

My own experience is that HR professionals in Hong Kong are generally extremely well informed about basic legal principles. Having said that, the minimum any HR professional in Hong Kong should have is a working knowledge of the Employment Ordinance.

I'm not suggesting they need to necessarily know a lot about dispute resolution, but they do need to know what the ordinance says. Things like the factors that need to be satisfied before you can summarily dismiss someone, the basic entitlements of employees to holiday, to sick pay, notice periods, payments in lieu of notice – these are all things that are set up quite clearly in the Employment Ordinance.

Q. Is ensuring the clause is in the contract to begin with something HR could play a role in?

I think so, yes. I'm not saying an arbitration clause is appropriate for every kind of contract. But some disputes that start in the Labour Tribunal are really not appropriate to be dealt with there. So I'm really talking about the top tier of employees, not about your average employee or middle manager. But for the contract of a highly compensated employee, certainly.

HR's role is not just about knowing what the rules and laws are. It's not just about hiring and firing. HR's role also ought to include playing a part in trying to avoid and if necessary resolve disputes. Not necessarily by a formal process or mediation, but by simply communicating with all the relevant stakeholders. HR can be a fantastic asset, and should always be involved if ever there's a dispute.

This article was originally published by Human Resources magazine on April 6, 2017 and is reprinted with permission. The original article can be viewed online here.

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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