Pinnacle News

Alternatives To Litigation
Part II - Arbitration

In our October newsletter, as a part of our report on Alternative Dispute Resolution, we discussed the basics of mediation: what is mediation, how to get to mediation, its benefits and downsides. In this installment, we turn to Arbitration.

What is Arbitration?

Arbitration and mediation share certain similarities. In both, 1) the hearing takes place with an experienced neutral evaluator who is chosen by both sides, 2) the parties split the cost of the neutral's time, and 3) the setting is an informal one, such as an office conference room, rather than a courtroom. The neutral is often a retired judge or, in some cases, a practicing lawyer with experience in the particular area of law raised by the case. However, that is where the similarities between arbitration and mediation end and where arbitration's similarities to a "court trial" begin.

A court trial, as opposed to a jury trial, takes place in front of a judge who becomes the "trier of fact," and decides all things a jury would normally decide. For example, did the defendant actually run the red light? Is the signature on the contract truly the plaintiff's? The process of an arbitration is very much the same. Like a trial court judge, the arbitrator (or a panel of arbitrators) alone listens to the evidence presented by both sides, weighs the evidence, and renders a ruling. There are, however, several differences between the court trial and arbitration processes.

The major substantive difference concerns the right to appeal. A party dissatisfied with the outcome of a court trial has the absolute right to appeal to a higher court if errors have been made by the trial court judge. But in arbitration, with few exceptions, the decision is final, and cannot be appealed. The major exception to this rule of finality is fraud in the proceeding itself. If it can be shown, for example, that documents were doctored or someone was clearly lying in the presentation, the aggrieved party may petition a court to overturn the arbitrator's ruling because of the fraud. However, because courts favor the rule of finality (and the use of alternative dispute resolution), getting an arbitrator's ruling overturned is, at best, problematic, even where the arbitrator committed legal error.

The second difference between a court trial versus arbitration relates to the procedural and evidentiary rules. In a court trial, the parties must abide by the Rules of Court, the Evidence Code, and myriad other statutory mandates that control how the proceedings move forward. Because arbitration is a private proceeding, the parties can choose, either when contracting or, if not in a contract, when the dispute arises, which rules apply. The major providers of arbitration services (JAMS, the American Arbitration Association, and ADR Services) also have their own rules that the parties can agree to. Often, parties to an arbitration simply choose to follow the statutory rules of court and the rules of evidence that govern court trials.

Evidence gathering is also different in the two settings. A court trial case requires lawyers to follow the Code of Civil Procedure, which governs pre-trial preparation of the case, and most particularly the discovery process. As anyone who has been involved in formal litigation knows, the discovery phase can be very involved and expensive. Document exchanging, depositions of key witnesses and experts, and the exchanging of written questions (interrogatories) can be the most tedious, time-consuming, and expensive part of the case. When disputes arise, the parties must resolve them through formal written motion to a discovery judge or referee followed by a hearing with oral argument. Though discovery is allowed in an arbitration, the process is more streamlined, limited, and informal. When disputes arise, the arbitrator generally hears them through conference calls and letters rather than formal filings and hearings.

The Right to a Jury Trial

The Constitution guarantees the right of a civil litigant to a trial by jury. Arbitrating a case, whether consensually or otherwise, waives this constitutionally protected right.

An arbitration may result from three scenarios: 1) a case filed in court that is ordered to arbitration; 2) a case filed in court that the parties later voluntarily agree to arbitrate; 3) a case where the parties have pre-litigation, contractually agreed to arbitrate disputes arising from their contract.

In court-filed cases involving potentially small damage recoveries, a court may order that the parties go through "non-binding" arbitration, where the parties present evidence at the arbitration and obtain a ruling. Any party dissatisfied with the result can reject it and go forward, with a clean slate, with formal litigation. There are pros and cons to this type of arbitration, however. On the one hand, it assists a party in evaluating the strengths and weaknesses of the case by vetting it before an impartial legal professional - in a way, a trial run on the trial . . . and the right to a jury trial is preserved. But a party rejecting the arbitrator's award runs the risk of having to pay the other party's legal costs if the result at trial is not better than the result at arbitration.

A voluntary arbitration after a dispute arises may be a cost-effective dispute resolution tool. However, it comes with the price (or, perhaps benefit) of proceeding without a jury trial. Whether the cost issues outweigh the jury waiver is something lawyers and clients have to evaluate fully together, taking into account the type of case, the need for formal discovery, and of course the risks (or benefits) of foregoing a jury trial.

The third method to arrive at arbitration, and the most controversial, is pre-litigation contractually-compelled arbitration. In arms' length commercial contracts between sophisticated business people, arbitration clauses in contracts are negotiated, anticipated, and more often than not, welcomed. However, in contracts written by those with an unfair bargaining advantage - (e.g., employment agreements, mortgages, car loans, credit cards) such arbitration provisions oftentimes are simply dictated, not negotiated. These are not arms' length transactions, and forcing the party who has a weak (or no) bargaining position into waiving right to trial by jury clearly is unjust.

Arbitration, like mediation, can be an excellent tool for getting good results in a cost effective manner. Like all steps in litigation, make certain to discuss the pros and cons of arbitration with your attorney so that you are able to make an informed decision at every step.

Eric Farber is a partner at Pinnacle Law Group LLP and specializes in litigation for his clients in Sports, Entertainment, Media, Real Estate and Consumer Issues.