United States: Arbitration V. Litigation Pros And Cons: What Business Lawyers Need To Know

Originally published in Texas Bar Journal, October 2006

Many business lawyers — especially those who represent international clients — harbor deep-seated concerns with the American jury system as a forum for dispute resolution. Haunted by visions of runaway juries and misunderstandings of highly publicized verdicts such as the "McDonald’s Hot Coffee"¹ case, they routinely insist on arbitration as the dispute resolution mechanism in contracts for their clients. This article addresses some of the pros and cons of arbitration versus litigation.

Parties to international contracts in particular have legitimate concerns about the partiality of the local judiciary. However, before selecting arbitration as your dispute resolution mechanism, it is important to determine in what forum you are likely to land if disputes arise. As jurisdiction is determined by the circumstances of the particular case, parties will either be placed before a federal judge with a lifetime appointment, an elected state judge, or possibly an appointee of the government whose permanent tenure is subject to a referendum. Their case may be decided by the judge in a bench trial or by a jury. Juries are another indeterminate component of the litigation process. A jury is selected at random, oftentimes from a list of registered voters. It is expected that the jury pool reflects the makeup of the local population. Thus, jury members come from varying ethnicities, races, and educational and economic backgrounds. Although jurors are paid for doing their civic duty, payment is minimal. As an alternative, attorneys can consider exploring jury waiver agreements in lieu of arbitration.

Arbitration is the preferred method of alternative dispute resolution for foreign investors and international investment guarantee/insurance agencies. For international transactions, arbitration in a neutral forum provides the hope of reducing bias and avoiding parallel lawsuits in different countries. Moreover, unlike trials, arbitration proceedings are closed to the public. Plaintiffs therefore lose the advantage of trying the case before the public and perhaps publicly tarnishing the reputation of the parties involved before proceeding to a trial on the merits. In addition, the arbitrator’s decision is not published and does not provide a binding precedent for future cases.

The panel is usually composed of arbitrators who are experienced professionals in the relevant industry. Panelists often include retired or active lawyers with legal expertise in the field of interest. Unlike judges, the panelists have familiarity with the nuances of a particular area of law based on years of experience. Because of their unique experience, panelists often have an enhanced image of participants in the international community as fair, sophisticated, and attractive investment partners. This knowledge also provides an advantage over having your case decided by a jury that lacks expertise in what can be a highly complex and technical case.

International clientele may be especially inclined toward arbitration in order to maintain control over the procedure and proceedings given that arbitration is a creature of contract. Some of the most important factors that parties can control through arbitration include: (i) the place of arbitration for neutrality, enforceability, and convenience considerations; (ii) the identity of the arbitrator; (iii) the language in which the arbitration is to be conducted; and (iv) the applicable substantive and procedural law that will govern the proceedings. Arbitration generally offers enormous variation in the mechanisms used to establish the facts and the law. Thus, parties entering an arbitration agreement may want to specify as much as possible with regard to discovery, i.e., that the arbitrators have the authority to compel various types of discovery. While this provision will not be conclusive if a subpoena is challenged in court, it will at least constrain the other arbitral party from objecting.

In litigation, the final decision is subject to revision by way of appeals at multiple jurisdictional levels. However, in arbitration, the claims and enforceability of the award can be defined by the contract. Thus, foreign investors prefer arbitration, which has at least the perception that awards are final and can rarely be appealed. For example, in Texas, there are only two bases for vacating an arbitration award: manifest disregard of the law and bias. Both methods require a very heavy burden of proof.

While there is a perception that arbitration costs significantly less than litigation, this depends on the complexity of the case. The costs and fees associated with hiring arbitrators, experts, and attorneys are dictated by the institution chosen by the parties. These fees may reach as high as if the case were going to trial. The arbitrator generally has the power to decide which party shall bear the costs of the arbitration and in what proportion.

Similar to trial proceedings, parties can seek to continue arbitrations. Thus, clients must be prepared for prolonged proceedings with lengthy and voluminous discovery. While the commencement of the proceedings have established timetables, the arbitrators have great discretion to extend those deadlines. In fact, complicated arbitrations may last for years with prowww. longed discovery. For example, a letter of credit dispute might be resolved solely on the basis of documentary evidence; a large construction case, in contrast, could involve years of proceedings, pretrial discovery, depositions, motions on applicable law, and jurisdiction.²

While the association governing the arbitration proceedings provides procedural guidelines, it goes no further. Thus, you must deal with the anxiety of proceeding with no established protocols and a process that allows arbitrators to make up the rules as they go along. Additionally, because arbitration panels are not subject to a higher governmental authority and the decisions are rarely appealed and, if appealed, rarely overturned, such "secret tribunals" are often distrusted due to their lack of accountability.

In arbitration, parties theoretically agree to abide by the arbitrator’s award. In reality, the losing party may nevertheless pursue options that may provide a more favorable outcome. Whether the losing party is successful in its pursuit depends, in part, on the choice of law provision contained in the contract, which governs whether a dispute is arbitrable, the substantive causes of action, and the potential enforceability and finality of the award. While a poorly drafted arbitration clause can allow parties to argue that an award is not final and can be appealed, a clearly drafted clause can foreclose this possibility. For example, in Baker Marine Ltd. v. Chevron, Ltd., the parties’ contract, which subscribed to the 1958 United Nations Convention on Recognition and Enforcement of Foreign Arbitration Awards, dictated that the dispute would be arbitrated in Nigeria under Nigerian law.³ When petitioners asked U.S. federal courts to confirm an arbitration award granted by arbitrators in Nigeria but overturned by Nigerian courts, the Second Circuit declined to enforce the arbitration award, noting that "mechanical application of domestic arbitral law to foreign awards under the Convention would seriously undermine finality and regularly produce conflicting judgments."

In Spier v. Calzaturificio Tecnica, S.P.A., the district court adjourned proceedings on the enforcement of an arbitral award given in Italy during the pendency of appeals to Italian courts concerning its enforceability.⁴ To avoid such disputes over enforceability and finality of an award, parties can agree that, once an award is made final in the jurisdiction of choice, the award cannot later be appealed in a foreign jurisdiction. In short, parties must clearly draft arbitration clauses to avoid any arguments regarding lack of finality or enforceability leaving open the possibility of appeal or nullification.

It is important to develop a sound, strategic plan for winning your case, taking into consideration the relevant, critical facts and applicable law. An advocate should be aware of the types of discovery requests allowed and the particular form that evidence can be submitted in while simultaneously anticipating an opponent’s arguments and evidence. Attorneys should know in advance whether counsel can prepare a witness for testimony before the hearing, what communications by an inhouse lawyer are considered privileged, whether a privilege log is required, if direct testimony should be provided in the form of witness statements, whether witness statements can supplant oral testimony, when a tribunal is permitted to appoint experts, at what stage should documents be exchanged, how are the burdens of proof determined, and which side has the last word.

A brief survey of the laws of the particular country will provide direction in these areas. For example, several civil law countries abhor the idea of pretrial discovery. Nevertheless, there is a general consensus in international arbitration that specifically identified documents will be ordered to be produced if the need is established, but whole categories of documents will not be ordered to be produced. Although it is standard practice that the parties are required to exchange in advance of the arbitration hearing the documents on which they will rely, a party making disclosure is under no general obligation to produce documents harmful to its case. With regard to witness testimony, common-law cross-examination is almost unequivocally permitted in international arbitration today. The advocate must assume that a witness’s written statements will be tested and inaccuracies and inconsistencies exposed. Therefore, witnesses and counsel should fully understand the facts and documents before reducing facts and arguments to writing. These questions, as well as others, can arise over the proper procedures to follow depending on the facts and applicable law; thus, a good case strategy involves knowing when and where to agree or object to requests, answers, or documents.

It is highly unusual for the parties to court proceedings to be given a say in the identity of their judge. In arbitration, by contrast, the parties will often have the opportunity to select their own arbitrators. Arbitrators are usually selected by the parties by narrowing down a list of potential arbitrators to a three-person panel that is acceptable to both sides. The final panelists are then chosen by either a party appointment or tribunal appointment. Attorneys should consider demanding additional lists from which to select arbitrators if the original list does not provide satisfactory candidates.

Frequently, one of the panelists is an attorney who is assigned the duty of addressing all evidentiary issues and points of law. Although a panelist may be a legal expert, most arbitrators from legal backgrounds recognize that arbitration often entails a looser interpretation of the law. Depending on the complexity of the case and the types of damages sought, technical experts may be preferable. If the facts of the case are highly complex, a technical expert may find it easier to pinpoint where a party was or was not wronged and explain this point to the other panelists. Regardless, it is important to research your potential arbitrators. Factors to consider include, but are not limited to, the arbitrator’s availability, persuasiveness, permissibility, or desire to participate in ex parte communications and whether he or she has the potential to be partial to one side or the other.

Essentially, areas of applicable substantive and procedural laws, pre-hearing discovery, admission of documentary evidence and witness interrogation during the arbitration hearing, rules on privileges, time allocations, allocation of attorneys’ fees and costs, and post-arbitration award enforcement mechanisms must all be considered and addressed in the contract to avoid the anxiety caused by a process that allows the arbitrators to make up the rules as they go along. It is important to address these concerns at the outset of the contract, as the litigants are unlikely to agree to very much once in arbitration. Additionally, a pre-arranged process precludes arbitrators from imposing rules or procedures that one party may never have expected.

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.