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Resolve Your Disputes Through Arbitration (Conclusion)

Resolve Your Disputes Through Arbitration (Conclusion)
Let’s analyze the questions that we asked during the last segment. First of all, how would you decide this case? When I ask this question in my class, there’s usually a lot of debate, sometimes heated debate, and often the class is divided into three parts. Some people say, “Well, clearly the contractor and subcontractor should be allowed to recover from the owner, the owner made the changes, the owner knew that the changes were being made, the contractor has the right to complete the work ahead of schedule.” A second theory of the class say, “Look, clearly the owner wins because the owner never approved the additional expenses.” And then a third group tries to split the bill.
For instance, they might say, “Well, the contractor can recover 55,000 from the owner but the contractor is liable to the subcontractors.” So, strong differences of opinion. Any surprises? The most surprise that people usually express is that they are surprised how legalistic an arbitration is. For instance, swearing in the witnesses, testifying under oath, the examination of the witnesses, the use of attorneys. That’s why I like to refer to arbitration as private litigation. It’s similar in many ways to litigation, although it is out of the public eye. Must the arbitrator be a lawyer? Well, this was covered at the very beginning of the video and the answer to that question is, no.
One of the lawyers was explaining to his client that they were lucky in this case because the arbitrator was both an expert on construction law and a lawyer but you could have either one. You are qualified to be an arbitrator if you want to. You do not have to be a lawyer. Must the parties be represented by a lawyer? The answer to that is, no. You’re free to go to an arbitration on your own. However, given the fact that this is a legalistic procedure you might want to bring in a lawyer if the other side is bringing in a lawyer. And finally, is litigation procedure followed in arbitration? No, not necessarily.
As this arbitrator pointed out near the beginning, the formal legal rules of evidence are not going to apply and he would use common sense instead of those traditional rules. Here’s an additional question. Is arbitration more expensive than litigation? Let’s assume that we have a $600,000 construction dispute and these cost estimates come from experts in Texas, Florida, and Pennsylvania. And my question to you is, in the $600,000 construction dispute, what costs more for filing the case and for the hearing and trial including legal fees for the hearing and trial, but not other legal fees? Which costs more, arbitration or litigation? Please think about that for a second. May want to write down your answer.
Is arbitration or litigation cost more for this construction dispute? Here are the results. Costs $300 in these States to file the case in court, and cost $8,500 to file the arbitration claim. Legal fees would be higher in litigation than arbitration but the cost of the arbitrator would be higher by almost $17,000. So the total cost for the filing, for the hearing, and for the arbitrator would be $49,000 as opposed to $36,000 in litigation, substantially higher in arbitration. Now, why is that? Well, it’s because when you use the court system, generally, you get free public goods.
You virtually get a free judge, you get a free courtroom, and you get a free flag whereas, in arbitration you have to pay for these. Where the difference is- If you look at the total cost, litigation does cost more and my guess is that that results mainly from discovery. Discovery is more elaborate, takes up more time legally in litigation than in arbitration. You can control discovery through your arbitration agreement. So keep these figures in mind when you’re negotiating an arbitration clause in a business deal. One other very important point regarding arbitration is illustrated by this case. We’ve got a guy named Camm who threatens to shoot another worker, Bingham, and also other workers where he works in Palo Alto.
These threats are considered a joke. Camm tells Bingham, “I can kill a man at 600 yards.” Camm owns 18 rifles and pistols. He has a personalized license plate, “SHOOT.” And one day, Camm and Bingham get involved in a workplace dispute and Camm says, “I’m going to shoot you, I’m going to shoot your wife, and I’m going to shoot your baby.” So, Palo Alto, the city of Palo Alto, fires Camm. Case goes to arbitration. The arbitrator says, “Look, this threat is just everyday boy talk,” and reinstated Camm with back pay. Now, my question for you is, is that a final decision or will the court interfere with that decision? Final or not? The answer, generally is, that is a final decision.
According to the court, “An arbitrator’s decision is not generally reviewable for errors of fact or law even when it causes substantial injustice.” Now, Palo Alto said, “But, wait a minute. Public policy requires us to have a safe workplace.” But the judge said, “Well, that’s true but that doesn’t mean you have to fire your employees.” There was a happy ending here in that, even though the arbitrator’s decision was valid, there were separate reasons that resulted in a reversal. There is a separate injunction against Camm that came into play. But generally, the rule to keep in mind is that arbitrator’s decisions are generally not reviewable for errors of fact or law.
In other words, the arbitrator’s decision- the arbitrator acts as the judge, as the jury, and as the Court of Appeals. And so there have been some major cases where this rule has come into play. Years ago, there used to be a firm called Arthur Andersen which has since disappeared, and they had a consulting arm called Andersen Consulting, which is now known as Accenture. And Andersen Consulting broke away. And the question is, when they broke away, what did they owe Arthur Andersen? Arthur Andersen was fairly confident that they were going to recover around $14 billion in compensation from what came to be known as Accenture.
But the arbitrator’s decision was only $1 billion and as this article notes, it cannot be appealed. That’s final, even though it was way short of what Arthur Andersen thought it should get. Despite this finality of arbitration awards, according to this study, a significant majority of companies in Asia, Europe and the Americas prefer international arbitration to resolve cross-border disputes. Corporations overwhelmingly favor the finality of arbitration awards. Although, I sense there is increasing dissatisfaction with arbitration for other reasons, especially because it has become such a legalistic process and as a result many companies now favor mediation even more than arbitration. And in the next segment we’re going to look at mediation.
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