We do a lot of insurance coverage work at our firm, and lately, I’ve been noticing that more and more insurance policies contain arbitration clauses. When it comes to insurance companies and their products, I sometimes channel my inner Groucho Marx: “Whatever it is, I’m against it.” (For a little Groucho relief, click here.) And for good reason. Last year, I had to try a case under one of these wonderful clauses, which required a panel of three arbitrators, all of whom had to be former insurance executives. Let’s just say that, as any experienced trial lawyer knows, most cases are over by the end of jury selection. (I have to add, though, that the results for us, while less than stellar, were not nearly as bad as they could’ve been.)
Many businesses, especially businesses likely to be defendants in court (like lenders and insurance companies) favor arbitration clauses. No wonder, given the marketing pitch: Arbitration is quicker, less expensive, and more predictable than being dumped into the mosh pit known as the American litigation system.
But does arbitration really have all those beneficial qualities, all the time? I think it’s important to consider several potentially negative factors before agreeing to arbitration. Here are a few, which have been amplified in recent cases:
First, you might think you’ll be saving money on legal fees by going the arbitration route. That’s not necessarily so. Especially (but not only) when dealing with a three-arbitrator panel (generally, two party-appointed arbitrators and an umpire), the arbitration fees can be enormous. And, at least in a complex commercial case, you’re still going to be dealing with the expense of the discovery process (depositions and so forth). So, unless you have a smaller case and a single arbitrator, don’t be so sure that you’re going to save a lot of money. That shouldn’t be the driving factor in your decision as to whether to arbitrate (if you have the choice).
Second, there’s virtually no right of appeal. What if, despite your efforts to pick a sane person to adjudicate the dispute, the arbitrator still does something wacky? Unless you can prove something super-egregious (I mean like your adversary handed a bag of unmarked bills to the arbitrator before the arbitration commenced), you generally have no recourse to an appeals court. Are you willing to live with that? Example: We tried an arbitration awhile back involving an employment claim, in which a sales rep for our client had been fired basically for being in a permanent slump. The guy wanted $15 million for breach of contract. It was the type of case that a federal court would’ve dismissed in a heartbeat, but the arbitrator, feeling the natural tendency to split the baby in arbitration, awarded Mr. Do-Nothing $2 million in damages. I suppose that’s a “win,” since his expert accountant argued that he was out a lot more than that, but it sure didn’t feel like one.
Which is not to say that Courts will never reverse an arbitration award. Consider the recent New Jersey Appellate Division decision in Asphalt Paving Systems, Inc. v. Associated Asphalt Partners, LLC, which you can read here. In that case, which involved arbitration as to the meaning of a contract, the arbitrator asked the parties the following question: “What would be the result if I determined that the agreement is too ambiguous to enforce?” A witness for the defendants apparently responded by jumping up, pointing his finger at the arbitrator, and loudly stating: “I will tell you what happens. You get sued for malpractice.” After the arbitrator issued a decision favorable to the defendants, the plaintiff appealed, arguing that the arbitrator had ruled in favor of defendants because of the threat. The Appellate Division, overruling the trial court, found that sufficient evidence existed as to undue influence that a further hearing was needed. (So much for saving time and money…)
As another example of the unpredictability of arbitration, in Excelsior Packaging Group, Inc. v. Bobst Bielefield, GMBH (currently pending before the United States District Court for the Southern District of New York), a company that sold printing presses reached a settlement with a commercial printing company for amounts past due for certain equipment. The printing company agreed to pay over $1 million in installments over two years, plus interest. The printing company made all the required payments, including interest, and in fact slightly overpaid the total amount due. But, after Excelsior had paid up, Bobst argued that installment payments had been late at least 10 times, although nearly all payments were made within one or two days of the due date. Bobst commenced an arbitration proceeding to try to collect a contractual late payment penalty of $772,457 (hey, what the hell, you miss all the shots you don’t take), together with several years of interest on the penalty amount. The arbitrator awarded Bobst $892,898 (which included attorneys’ fees, late fees, and interest). That’s 84% of the settlement amount. Excelsior has now petitioned the federal court to vacate the arbitration award, on the ground that it’s crazy. I think if this had been a Court case, an appeals court would listen. Since it’s an arbitration, I’m not so sure. How would you like to be in that position?
If you’re going to arbitrate, though, be sure to demand arbitration as early as possible, or a Court may hold that you waived your right to do so. That’s the issue right now in a case also pending in the Southern District of New York, Vertime, B.V. v. New Dover Group, Ltd. New Dover distributes watches and entered into multiple distribution agreements with Vertime (which makes Timex watches). Each of the agreements contained an arbitration clause requiring the arbitration of disputes in Switzerland. After dispute arose under the agreements, Vertime sued, seeking an injunction restraining New Dover from continuing to sell Vertime products. Vertime got the injunction after a series of evidentiary hearings, and then argued that the remainder of the dispute had to be decided by a Swiss arbitration panel. Not so fast, said New Dover…you guys already waived your right to arbitrate by commencing the lawsuit seeking an injunction. In support of its application, New Dover has cited the familiar federal case law that states: “To permit litigants to exercise their contractual rights to arbitrate…after they have deliberately chosen to participate in costly and extended litigation would defeat the purpose of arbitration: that disputes be resolved with dispatch and with a minimum of expense.” Com-Tech Associates v. Computer Associates, International, 938 F.3d 1574, 1578 (2d Cir. 1991). (This case, of course, raises another important issue: always check your contracts and agreements before signing them, to see whether there’s an arbitration or venue clause requiring you to litigate disputes in an inconvenient faraway land.)
There are a couple of options to arbitration clauses that are worth exploring. First, instead of arbitration, consider specifying the Court in which any disputes must be litigated, and include a “waiver of jury trial” clause. Requiring a bench (judge) trial in a specific forum in your agreement may save you time and energy, without having to incur the expense of arbitrators. Second, you may be able to draft dispute resolution provisions in commercial agreements that limit discovery and provide for a relatively expeditious Court hearing.
Lastly – and most importantly – remember what most people forget when reviewing contracts: The method of resolving a dispute can be just as important as the merits of the dispute itself.