Arbitration and Its Discontents

by Nicholas Walsh, PA

Lately I've been caught up in a couple of cases which have pointed up some of the problems with arbitration. Maybe you can learn from my experience.

First some definitions. Arbitration is a form of what lawyers call "alternative dispute resolution,” sometimes shortened to ADR. Mediation is also a form of ADR. Although laypersons often confuse arbitration and mediation, they are completely different animals.

Anyone in a dispute with another person, even a dispute that ends up in court, can always discuss a settlement. Sometimes that discussion is easier if a third party is involved: A mediator. A good mediator listens to each side, privately tells each side the strengths but also the weaknesses of the party's case, goes back and forth with settlement offers, and basically tries to get the parties to Yes. The best mediators know the case and the case law cold, and have sufficient years of experience in litigation that their recommendations carry some authority.

Many Maine civil cases are required to undergo mediation before they get to a trial. If you have such a case, make sure you and your lawyer are solidly prepared to advocate at mediation, and try to get a really good mediator. Mediators are paid by the hour, and they are expensive, but mediation offers the real possibility to close the file on the case and you are well advised to take advantage of that opportunity.

The one thing a mediator cannot do is decide the case or force a settlement. That's where arbitration is different. An arbitrator is essentially a private judge hired by the parties to actually decide the case, after a private trial. The parties decide who the arbitrator will be, a critical step. The parties pay the arbitrator at an hourly rate. An arbitrator's decision can be filed into court where, with a sprinkling of legal magic dust, it converts into a judgment of the court, enforceable as such.

People find themselves in arbitration in two major ways. First, many contracts, including product warranties, provide that if there is a dispute over the contract or warranty the dispute will be decided by arbitration. But many lawyers and individuals routinely agree to arbitration clauses in contracts that are actually negotiated. In my opinion that ought to be thought through and can be a mistake.

Second, parties may initially go to court and then decide to have the case decided in arbitration.

Arbitration has its advantages. The parties pick the arbitrator – it's pretty hard and generally not possible to pick a judge. Arbitrated cases are decided in months, not years as is often the case in state court. (The Maine Federal District Court moves much faster than the state court.) The rules of evidence are relaxed, as is civil procedure, so matters tend to move smoothly. The arbitration itself can be scheduled to a date certain, something frequently impossible in state or federal court. The arbitral decision can be kept private.

On the other hand, arbitration can be expensive. In addition to paying your lawyer, you have to pay the arbitrator's hourly rate. If a party agrees to arbitrate and does not pay, it is possible for that party to lose by default. Most judges are good, while your arbitrator may turn out to be a dud. The rules of discovery, by which we can take the sworn testimony of witnesses in advance of trial, compel production of documents from the other side and from third parties may hardly exist, a real problem when one side controls the bulk of the evidence.

Finality of decision, often considered a great advantage of arbitration, can also be a huge disadvantage. In law we have the concept of due process, the fundamental procedures that make it fair for a court to impose its judgment on a party. The due process factors we learned on day one of law school are notice of the trial and the rights to be heard, to confront one's accuser and to compel witnesses to testify. But the right of appeal is also considered to represent fundamental due process. Everyone makes mistakes, and that includes judges and arbitrators. If a judge makes a mistake it can be corrected on appeal to a higher court. Arbitral decisions are final, unappealable, unless you have video of a party slipping an envelope full of cash into the arbitrator's pocket. You are stuck with the decision no matter how screwed up.

Finally, there is the matter of enforceability. An arbitral decision for money damages can be converted into a court judgment and enforced, as I wrote above. But many cases don't result in money damages. The plaintiff may be seeking, for example, an order that a neighbor fix an overflowing cesspit, or some other order compelling a person to do something or to refrain from doing something. Judges are good at that and disobeying a court order can land a person in jail for contempt, even in a civil matter. Arbitrators aren't really equipped for such orders and certifying an arbitral order to compel into court is problematic.

There is some bottom line here. If somehow you are involved in a huge complex commercial dispute, arbitration may well make sense. But if you need to use the rules of discovery to ferret out facts and witnesses, and if you may need the court's help in forcing compliance with discovery requests and court orders, give serious consideration to declining an invitation to arbitrate. And if you are negotiating a contract for the build of a house or boat, for example, consider whether, if things go south and you have to sue, will you be happy you waived your right to be heard by a real judge in a real court.

Stay out of trouble.

Nicholas Walsh is an admiralty attorney with an office in Portland, Maine. He may be reached at 207-772-2191, or nwalsh@gwi.net.