Getting What You Expected: Preserving the Benefits of Commercial Arbitration
Arbitration has progressively become the preferred manner for resolving commercial disputes. Indeed, it is increasingly rare to find a sophisticated business agreement that does not contain an arbitration clause. Despite its escalating popularity, arbitration agreements too often fail to maximize the benefits that arbitration offers and that clients often expect.
Follow the Rules
Arbitration is nothing more than a contractual agreement to resolve disputes outside of court and before a private decision-maker. The parties to an arbitration agreement are thereby free to agree upon virtually any process they desire to resolve their disputes. However, that freedom can often lead to unintended results. Too often, parties (through counsel) draft arbitration agreements that transform arbitration into a process resembling private litigation. They engraft into the agreement processes familiar to the civil litigant (e.g., depositions, extensive written discovery, motion practice) that all but eliminate the time and cost savings arbitration is designed to provide.
To preserve the time and cost efficiencies of arbitration, arbitral participants are best served by incorporating arbitral institution rules into their agreements and, for the most part, sticking to them. Institutions like the American Arbitration Association (AAA) are keenly aware that the chief benefit of arbitration is time and cost savings. As a result, their rules contain deadlines and requirements that restrict discovery, all but eliminate costly motion practice, and tailor resolution of the dispute in a timely and cost-effective manner.[i]
As an illustrative example, we recently represented the sellers of a textile manufacturing company in a strongly contested dispute involving a multitude of claims related to a stock purchase agreement (SPA). The buyer alleged claims of fraud, breach of contract, and unjust enrichment against our clients and sought damages exceeding $35 million. In turn, our clients sought recovery of the remaining purchase price owed by the buyer and its affiliated entities. The SPA contained an arbitration clause that required arbitration of the parties’ disputes before the International Court of Arbitration of the International Chamber of Commerce (ICC). Initially, the buyer attempted to pursue its claims in federal court, but ultimately recognized the validity of the arbitration clause and proceeded in arbitration before the ICC.
The ICC arbitration proceeded efficiently, following an agreed-upon procedural timetable required by the ICC’s Rules of Arbitration (ICC Rules). In accordance with the ICC Rules and the parties’ stipulations, the parties were afforded a limited period within which to serve written discovery and issue third-party subpoenas. Depositions were not permitted. Motion practice was limited as well. In addition to documents, the parties exchanged fact and expert witness statements in advance of the hearing. The hearing was held less than nine months after the arbitrator’s appointment. The hearing was conducted virtually due to COVID-19, with the arbitrator appearing from Chicago, legal counsel appearing from Omaha and Atlanta, and fact and expect witnesses participating remotely from cities throughout the United States and in Mexico. Thus, a complex multi-million-dollar business dispute, involving fact witnesses from different countries, multiple expert witnesses, and a significant number of exhibits, was arbitrated in less than nine months.
After the hearing, the arbitrator issued an award denying all of the buyer’s claims and awarding our clients a full recovery nearing $6 million, which included interest, attorney fees, and costs. Had the dispute proceeded in federal court, we can confidently state a dispute of this nature would not have been resolved in half the time it was accomplished in arbitration. Naturally, the time and cost savings were considerable.
Even when companies are not faced with the prospect of multi-million-dollar liabilities, most arbitral institution rules provide for expedited “small-claim” resolution that preserve the cost-efficiencies of arbitrating rather than litigating the claims in court. For example, the AAA’s Commercial Arbitration Rules and Mediation Procedures (AAA Rules) contain an Expedited Procedures section that applies to arbitral proceedings where no claim or counterclaim exceeds $75,000.[ii] Under the Expedited Procedures, there is no provision for discovery, the hearing must occur within 30 days of the arbitrator’s appointment, and the award typically must be rendered within 14 days after conclusion of the hearing.[iii] Thus, whether the claims at issue are big or small, there is usually a place for arbitration—that is, provided due care has been taken to preserve the efficiencies that make arbitration an attractive alternative to litigation.
Keeping it Quiet
Many clients assume that because they have agreed to arbitrate their dispute before a private arbitrator, the filings, testimony, and results of the arbitration will never see the light of day. But most often that is not true. While arbitration hearings are generally conducted in private (i.e., not open to the public), the contents of the proceedings and the ultimate result are not per se confidential.
If parties to an arbitration agreement desire confidentiality, they must contractually agree to it. Beware that incorporating an arbitral institution’s rules into an arbitration clause seldom triggers a confidentiality obligation as most do not contain comprehensive confidentiality requirements. For example, the AAA Rules—a common source of background rules for commercial arbitration agreements—do not impose requirements of confidentiality upon the arbitral participants. Thus, if confidentiality is important, including a confidentiality provision in the arbitration clause is paramount.
Even when parties contractually agree to confidentiality, problems arise if court enforcement of the arbitration award becomes necessary. When the losing party fails to honor the results of the arbitration (i.e., voluntarily pay the judgment rendered against it), the prevailing party must seek enforcement of the award in court before pursuing collection. Under the Federal Arbitration Act, to confirm an arbitration award, the prevailing party must file a copy of the award with the court.[iv] While the cautious litigant should seek to file the award under seal in order to conform to the requirements of the confidentiality agreement, there is no guarantee the federal court will grant such a request.[v]
Given the reluctance of courts to seal most aspects of arbitration-related filings from public consumption, an alternative approach parties may consider when confidentiality is of primary concern is to require that the arbitrator refrain from issuing a reasoned award. Arbitrators have no obligation to include reasoning in their awards.[vi] However, arbitration agreements sometimes include a requirement that the arbitrator provide some level of reasoning when issuing their awards (e.g., requiring findings of facts and conclusions of law). Even when the arbitration agreement is silent on this issue, some institutional rules require or authorize the arbitrator to issue a reasoned award.[vii] Additionally, it is commonplace for arbitrators, at the commencement of an arbitration, to inquire with the parties regarding the form of award they require. Thus, while arbitrators are not generally required to issue reasoned awards, there are several opportunities along the arbitration trail for the parties to impose such a requirement.
It is certainly understandable why parties require reasoned awards. It would be difficult for most arbitral participants to stomach engaging in a contested process, with substantial sums on the line, only to receive a three-sentence award identifying nothing more than the victor and the spoils. However, there are circumstances where the arbitrator’s stated reasoning may do more harm than any economic recovery awarded. Take, for example, a company or prominent businessperson who has been accused of fraud in connection with a business transaction. The reputational harm caused by an award detailing the fraudulent acts could very well exceed any damages awarded in the arbitration. In such instances, potential arbitral participants and their counsel must weigh whether the possible ancillary harm caused by a reasoned award may far outweigh the benefit of understanding how the arbitrator reached his or her conclusion.
Significant efficiencies and layers of privacy are available to arbitral participants if they so desire. At bottom, ensuring those benefits are maximized starts before the dispute has ever arisen. Given the prevalence of arbitration clauses in commercial agreements, they should no longer be relegated to the land of boiler-plate add-ons. Instead, drafters of commercial agreements should approach arbitration clauses with the same care, client consultation and, if necessary, negotiation as other material terms of the agreement. Failing to do so can have meaningful consequences and may result in your client asking why they did not get what they expected.
If you have questions or are in need of assistance regarding a commercial arbitration matter, please contact Matt Watson, a shareholder in the firm’s commercial disputes group, at: 402.492.9200 or firstname.lastname@example.org.
[i] In the event parties desire to include additional procedures not provided for by institutional arbitral rules, such rules commonly permit additions provided there is mutual agreement. See, e.g., AAA Commercial Arbitration Rules and Mediation Procedures (AAA Rules), R-1 (Oct. 1, 2013) (“The parties, by written agreement, may vary the procedures set forth in these rules. After appointment of the arbitrator, such modifications may be made only with the consent of the arbitrator.”).
[ii] See AAA Rules, R-1(b), E-1-E10.
[iii] See AAA Rules, E-7, E-9.
[iv] See 9 U.S.C. § 13(b).
[v] See, e.g., XPO Intermodal, Inc. v. Am. President Lines, Ltd., 2017 U.S. Dist. LEXIS 176820 (D.D.C. Oct. 16, 2017) (citation omitted) (denying motion to seal petition to confirm arbitration award, permitting only the redaction of potentially proprietary business information, and noting that “generalized business interests in confidentiality simply ‘do not rise to the level of the privacy and property interests that courts have permitted to outweigh the public’s right of access’”).
[vi] See United Steelworkers of Am. v. Enter. Wheel & Car Corp., 363 U.S. 593, 598 (1960) (“Arbitrators have no obligation to the court to give their reasons for an award.”).
[vii] See, e.g., AAA Rules, R-46(b) (“The arbitrator need not render a reasoned award unless the parties request such an award in writing prior to appointment of the arbitrator or unless the arbitrator determines that a reasoned award is appropriate.”).
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