Why Arbitrate? The Benefits and Savings in Time and Cost
By Edna Sussman
This article first appeared in the October 2009 edition of the New York State Bar Association Journal
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“Choice- the opportunity to tailor procedures to business goals and priorities- is the fundamental advantage of arbitration over litigation.”1
Much has been written in recent years questioning the benefits of arbitration over litigation and asking whether arbitration has become so much like litigation that the most commonly cited benefits of arbitration, saving time and money, no longer pertain.2 A response to these questions requires a review of the many benefits of arbitration, a look at the empirical data on the speed and cost of arbitration and a summary of the mechanisms available to the arbitrators, parties and their in- house and outside counsel to control costs and increase efficiency.3
The many benefits of arbitration have led to the extensive use of arbitration as the process of choice for dispute resolution in commercial disputes. These benefits include:
Faster and Cheaper– As is discussed at greater length below, arbitration is the parties’ process. The parties can craft and implement a streamlined procedure which can significantly reduce costs and provide for a much speedier resolution than can be found in court. In the arbitration framework the arbitrator has the ability to guide the parties to a swifter and less costly process in a way that is simply not achievable in court.
Flexible Process- As arbitration is a creature of contract, the parties can design the process to accommodate their respective needs. Hearings may be set at the parties’ convenience and the less formal and adversarial setting minimizes the stress on what are often continuing business relationships.
|If the parties jointly seek to extend or complicate the arbitration, they may obstruct the arbitrator’s ability to achieve efficiency goals.|
Subject Matter Expertise- Arbitration permits the parties to choose adjudicators with the necessary expertise to decide complex issues which often require industry specific knowledge.
Finality– Judicial review of awards is restricted to very limited issues. The finality of awards is particularly important in business transactions. In many instances, with the cost of capital, the time value of money and the paralysis that indecision can bring to businesses, the most important consideration in a commercial dispute is that it be quickly and definitively decided.
Confidentiality– Arbitral hearings, as opposed to court trials, are generally private and confidentiality can be agreed to by the parties. This is an important feature for many corporations, particularly when dealing with disputes over intellectual property and trade secrets.
Certain additional features of arbitration in the international context are of particular importance:
Cross-border Expertise- Arbitration permits the parties to choose adjudicators with the necessary expertise to decide their dispute. Such special expertise can include an understanding of more than one legal tradition such as common law, civil law or sharia law, an understanding and ability to harmonize cross-border cultural differences and fluency in more than one language.
Neutrality– In the international context, arbitration provides a neutral forum for dispute resolution and enables the parties to select decision makers of neutral nationalities who are detached from the parties or their respective home state governments and courts, in a setting in which bias is avoided and the rule of law is observed.
Enforceability – In the international context, a critical feature is the existence and effective operation of the New York Convention to which over 140 nations are parties. The Convention enables the enforceability of international arbitration agreements and awards across borders. It significantly limits the grounds for refusing to enforce an arbitration agreement or award making it possible to enforce an award even in a jurisdiction that might otherwise find ways to favor its domestic party. In contrast, judgments of national courts are much more difficult and often impossible to enforce abroad.
Thus, even apart from the lower cost and greater speed, many parties choose arbitration for dispute resolution for one or more of these many other benefits.
Is arbitration really faster?
The availability of a quicker process than a court proceeding has long been one of the principal drivers for the selection of arbitration for dispute resolution in business transactions. The statistics support the long held belief that arbitration on the whole continues to be a mechanism for achieving speedier dispute resolution. The American Arbitration Association (AAA) reports that for its business to business cases in which awards were rendered in 2008 the median length of time from filing of the demand to the award was 238 days or 7.9 months. 4 The AAA’s international arm, the International Centre for Dispute Resolution (ICDR) reports that for its cases in which awards were rendered in 2008 the median length of time from filing of the demand to the award was exactly 365 days or 12 months.5 The International Institute for Conflict Prevention and Resolution (CPR) reports that for its domestic and international cases combined in which an award was rendered in 2008 the median length of time from the filing of the demand to the award was 11.5 months.6
By contrast, as reported for 2008, the median length of time for civil cases through trial in the U.S. District Court for the Southern District of New York was 30.7 months for jury cases and 27.0 months for non-jury cases, a number in line with most other federal district courts.7 The median length of time from filing in lower court to disposition in the Second Circuit for cases that were appealed was 43.1 months.8
The Bureau of Justice Statistics reports that for state court contract cases in the 75 largest U.S. counties the average length of time from case filing to trial in jury cases was 25.3 months and for bench trials 18.4 months.9 Additional delays for appeals similar or lengthier than in federal court are undoubtedly to be found for state court appeals.
Thus as compared with both U.S. federal and state court systems, arbitration affords a significant time saving for the vast majority of cases. Indeed the average case appears to reach resolution three to five times faster in arbitration. In the international arena, it must be noted that many courts systems are considerably slower than those in the United States.
Cost of counsel is the most significant cost of litigation as discussed below. Inevitably, a longer process requires the expenditure of additional lawyer time as it creates opportunities for additional discovery and motion practice. The abbreviated schedule in most arbitrations is usually directly linked to significant cost savings.
Is arbitration really cheaper?
The reduced costs available in arbitration have historically been viewed as another principal reason to favor arbitration over litigation. It is true that access to the courts is essentially free while arbitration has some costs associated with it, i.e. the cost of the administering institution if one is selected and the cost of the arbitrator(s), but this must be viewed in light of the total cost of the proceeding, including counsel costs and other costs of preparing a case. There appear to be no definitive statistical studies comparing the costs of arbitration with litigation in commercial cases. However informal comparisons and anecdotally arbitration appears to be generally cheaper.10 It certainly provides a process that can be streamlined by the parties.
Only a small part of the total cost of arbitration goes for the fees and expenses of the arbitrators and the tribunal, the “additional” cost of arbitration. The International Chamber of Commerce reported that 82% of the costs incurred were borne by the parties to present their case, including lawyer fees and expenses, expenses related to witness and expert evidence and other case preparation costs.11 Thus arbitrators and institutional charges were only 18% of the cost of the arbitration. The costs for case preparation and presentation are much more easily controlled in arbitration than in litigation.
In litigation one is subject to the Federal Rules of Civil Procedure or parallel state court rules which allow for broad discovery including both document discovery and depositions. Typically discovery is a very costly part of trial preparation and can be burdensome to the parties as well. Document discovery is generally more limited in arbitration. Depositions are either dispensed with altogether in arbitration or are severely limited in number. Extensive motion practice is commonplace in court but is much less common and, in fact, usually discouraged in arbitration.
Court cases require greater counsel time for preparing and going to trial than is the case with arbitration. For example, trial related matters not pertinent to arbitration include evidentiary issues, voir dire and jury charges instructions, and proposed findings of fact and law. Appeals from trial court decisions are commonly filed, a process generally unavailable, and, in any case, very unusual in arbitration.12 A saving of all of these additional costs of counsel must be factored into any consideration of the costs of arbitration and suggests that arbitration can be, and generally is, much less expensive even with a paid adjudicator.
Any system of dispute resolution whether arbitration or litigation will have its outliers, the cases that run amok, and it is easy to point to those anecdotally to support a negative view. However, any realistic analysis must look to the functioning of an overall system and the ability of the parties to craft a process that meets their needs. If cost and time savings are important to the parties, arbitration provides a mechanism for achieving those goals. Litigation may have many other virtues but it simply does not offer the parties the opportunity to tailor the process to meet those objectives.
Susan Zuckerman, Comparing Cost in Arbitration and Litigation, 62 Jul. Disp. Res. J. 42 (2007) (An anecdotal study in which three construction litigators and arbitrators concluded that litigation was 27% more expensive than arbitration even assuming that several depositions were taken in the arbitration and excluding the costs of appeals in a court proceeding.)
See e.g. Hall Street Assocs. v. Mattel, Inc., 128 S. Ct. 1396 (2008). Some institutions provide for an appellate process with a panel of arbitrators but parties have not commonly availed themselves of this option. For example CPR established rules for an appellate process with a panel of three arbitrators in 1999 but the process has never been used by any party.
This article focuses on commercial disputes. Consumer and employment arbitration which has been controversial in recent years and has been the subject of numerous studies and articles is beyond its scope.
Edna Sussman is a seasoned arbitrator and mediator. She serves on the arbitration and mediation panels of many of the leading dispute resolution institutions, including the American Arbitration Association (AAA), the International Centre for Dispute Resolution (ICDR), the International Institute for Conflict Prevention and Resolution (CPR), the World Intellectual Property Organization (WIPO) and the mediation panels of the federal, bankruptcy and state courts in New York. She can be reached at email@example.com.