InsideCounsel Publishes "10 Arbitration Myths and Realities for Corporate Counsel" by CPR's Noah Hanft

March 24, 2015

This article first appeared in InsideCounsel magazine on March 24th, 2015. To view the original article, click HERE.
For a PDF of the article, click HERE.

10 Arbitration Myths—and Realities

CPR's Noah Hanft attempts to set the record straight and report on the current realities of this powerful “alternative” option

By Noah J. Hanft
March 24, 2015

On the part of in-house counsel and law firm lawyer alike, when it comes to weighing the pros and cons of arbitration as opposed to litigation, myths and misconceptions abound. Some of these may have been based in fact, at one time, but have never been re-adjusted in light of several recent and somewhat radical developments in the field. This article will attempt to set the record straight and report on the current realities of this powerful “alternative” option.

MYTH #1: Arbitration costs a lot, and can last forever.

REALITY: Just as with litigation, a badly managed arbitration can be costly. However, because of its inherent flexibility, arbitration provides more of an opportunity to manage costs. In fact, some provider organizations now offer rules that enable parties to use expedited proceedings to address issues in a more efficient manner, and to exercise additional control by providing only for those administrative functions needed. Parties today can also set the parameters for how long a proceeding can last. (By way of example, even when expedited proceedings are not specified, administered arbitrations from one provider of administered arbitrations, CPR (with which the author is affiliated), are designed to take no more than one year.)  

MYTH #2: Arbitration does not allow parties the broad discovery options they may need. Many assume that—unlike litigation, with its liberal discovery rules—arbitration leaves parties with little to no opportunity for discovery, setting the stage for some potentially nasty surprises.

REALITY: Arbitration is, for the most part, a contractual creation. The parties are free to decide for themselves processes to be utilized, including how much discovery they will allow, which will limit costs.

MYTH #3: Arbitration decisions are final and un-appealable.

REALITY: It is true that, traditionally, a neutral arbitrator’s decision has been very difficult to appeal (with limited exceptions, e.g., for fraud or stepping outside the agreed-upon arbitration scope) and parties often prefer the finality of arbitral decisions.  However, there are some rules available now that expressly allow parties to provide for an appellate arbitral procedure.

MYTH #4: There is no guarantee of confidentiality in arbitral proceedings.

REALITY: A small number of dispute resolution providers are now explicitly specifying in their rules that proceedings will remain confidential—with this obligation binding on both the parties and the arbitrators.  

MYTH #5: Neutrals can be inexperienced, and don’t have to follow the law.

REALITY: Parties have the option to select a neutral (in some cases, choosing from very narrowly focused provider subject matter panels) with a specific skill set and expertise that would enable more accurate and efficient decision-making. The basis for decision-making can also be expressly defined. Most provider organizations now offer rules that require arbitrators to apply the governing law and provide reasoned decisions.

MYTH #6: Because of the selection process, the arbitrator can be biased.

REALITY: Some parties may worry that, if a neutral is selected by one of the parties, that neutral may be biased in the selecting party’s favor. Several years ago, CPR put into place a unique screened selection process, through which arbitrators are appointed without ever knowing which party selected them.

MYTH #7: There are some kinds of cases that are not suitable for arbitration and must always be litigated.

REALITY: Some are of the opinion that certain categories of cases, e.g., intellectual property cases, can never be arbitrated. But there are no such clear-cut rules. Each case needs to be assessed thoughtfully with the parties asking such questions as: Do they want the decision to be public and precedent setting? Is jury unpredictability a concern? What are the parties’ scheduling and discovery needs? Is it important to the parties that they have control over the selection process? Does the case require a specialized understanding of the subject matter? Note: the answers to these questions should be given in the context of not only the case itself, but also the underlying—and possibly continuing—commercial relationship between the parties.

MYTH #8: The old “default clause” is fine.

REALITY: Yes and no. So,…maybe. Most transactional lawyers have probably done it—in a pinch, pulled the same old dusty clause from some ancient contract and thrown it in at the last minute, without much thought. When haggling over big dollars amounts and deliverables, the arbitration clause may to the uninitiated seem like one of the less important ones, comparatively speaking. Not so. While using a model clause can be a good way to go, especially for inexperienced arbitration counsel, it is important to make sure you’re using the one that most directly meets your needs (there are now several very different options available).

MYTH #9: Once arbitration starts, it can’t get settled.

REALITY:  Some rules encourage mediation/settlement, so this definitely remains an option.

MYTH #10: Alternative Dispute Resolution is still “Alternative”

REALITY:  Gone are the days, if they ever existed, when dispute resolution was some kind of new-fangled and alternative “litigation lifestyle.” Smart companies and their in-house counsel long ago recognized the value of dispute resolution, and began incorporating it into their “tool kits”—at least as one possible option. In fact, this trend has also recently become particularly noticeable on the international front, as evidenced this by this 2013 Queen Mary University of London, School of International Arbitration and PwC Survey, 'Corporate Choices in International Arbitration,' which found that businesses actually prefer to use arbitration over litigation for cross border disputes. A recent CPR, Pepperdine, Cornell Survey survey, too, showed the mainstream use of mediation and the growing use of early case assessment and early neutral evaluation.

In sum, it may be time to pen a new mythology, one in whose plot arbitration has officially arrived, carrying with it many exciting options and some new—and highly effective—rules with which to practically utilize it.

Noah J. Hanft is the President & CEO of the Institute for Conflict Prevention & Resolution, which has recently released rules for the administered arbitration of both domestic and international disputes. Hanft previously served as general counsel of MasterCard between 2001 and 2014. He can be reached at nhanft@cpradr.org.