To Arbitrate Or Not To Arbitrate, That Is The Question.

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To arbitrate or not to arbitrate, that is the question. That has become a pretty hackneyed way of putting an issue in play. Here’s another hackneyed way of expressing something: “We’re not going to touch that third rail.” Roughly translated that means that Ruminations, in its old age [approaching 200 blog postings] is getting too wise to take a firm stand and offer anything other than an equivocal answer to that question, a lawyer’s answer so to speak – “It depends.”

Before anyone switches off to watch Pawn Stars or something else, let us explain. To us, it depends on what the subject matter of a dispute might be. An easy example is that only a court can issue a warrant of possession that a governmental official will enforce. So, we’re thinking that’s not a good “subject” for arbitration.

On the other side of the equation, except with respect to a few substantive areas where a subset of “special subject matter” judges has been selected, the rest are expected to be able to parse their way through the substance of any kind of dispute. So, when it comes to highly technical matters, such as construction issues, using a subject-matter expert arbitrator would seem to be the way to go. That is, it would be if both sides of the dispute are ready to accept some form of “objective” truth. By the way, the court process (and, by extension, the arbitration process) is thought of as a “truth-seeking” process.

So, for Ruminations, the first reason “it depends” relates to the subject of the dispute. Do the parties want to “teach” the technical background to a judge in order that she or he is able to reach the “right” answer? Or, will a judge’s general background be sufficient?

When we’ve been in a room where the judge versus arbitrator question is being discussed (argued?), what we’ve almost always heard are arguments about “process.” That means about cost, time to resolution, availability of discovery (i.e., the ability, before the “trial” or “hearing,” to get the other side and third parties to give you all of their paperwork and tell you everything they know), and things like that. So, another “thing” to which the answer to “which is better” depends on is what you believe about each of the two processes. Discussing that is really the “third rail” we alluded to above.

Generally, those who negotiate agreements have little experience with actual court/arbitration dispute resolution though some (many?) negotiate that “choice” as if they do. What they have in common is that they’ve heard lots of opinions about “which is better” and what they’ve heard is lopsided in favor of the “litigator’s” point of view. That’s unfortunate, not because litigators aren’t in a good position to teach us about the appropriate decision criteria, but because they are litigators. If you go to a surgeon, you’re going to hear how surgery is the “cure.” Classically, law schools teach from “cases,” using court decisions to explain the “law.” So, law students (who grow up to be lawyers) get a very court-centric view of dispute resolution. Add in a healthy dose of “civil procedure,” “evidence,” and trial courses, and graduates are primed for facing judges. They are “armed” with rules of discovery (depositions, requests for interrogatories, requests for production of documents, subpoenas duces tecum, etc.) and think all of those “tools” are the cat’s meow. And, they certainly are, in the right circumstances. On the other hand, while a sledgehammer is a useful tool for heavy construction, and can be used to hang a picture, it isn’t universally wise to use it for every task around the house.

So, what one often hears from litigators about the utility of arbitration is that it is no less costly than a “trial,” takes just as long (if not longer), doesn’t allow for “discovery,” and decisions aren’t appealable. If the first two assertions are correct, then we can’t use either factor as part of our decision criteria because you could hear the following objections to using the court process: “It costs the same as arbitration and takes just as long (if not longer).

So, what about “discovery”?

One of the “nice” things about arbitration is that the parties can make up their own rules. They can call for “discovery” right in their agreement. In their agreement to arbitrate, they can incorporate all of a state’s discovery rules or establish their own set of “abbreviated” rules. They can require a “reasoned” opinion. They can even agree that an appeal can be heard. In fact, the American Arbitration Association has a set of “appellate” rules. Other arbitration services may have their own as well.

None of that is to suggest that arbitration is better than judicial resolution or vice versa, only to point out that we’re singularly unimpressed by the arguments we hear from either “side” about why arbitration is “great” or “don’t go near it with a 10 foot pole.” That leaves us with our own uniformed, but reasoned position: use it when it makes sense to do so. Arguments about the includability of a particular item as part of recoverable operating costs seems like something for which arbitration in front of an experienced person makes sense. So would a disagreement as to whether denial of consent for an alteration was reasonable. We’re less sure about “he said – she said” disputes even though arbitration can be made to mimic the judicial process. After all, if the advantages of doing so aren’t clear, why use the imitation when you can use the original?

Basically, we’re circling back to where Ruminations started today; we think arbitration is a good idea when you want an “expert” to create the outcome. This isn’t necessarily because arbitration is less expensive and it isn’t because it is faster. Both of those things, though probably true in the overall sense, may not be true in any particular situation. It is because parties should want to get to the “truth” whatever that might be. Perhaps knowing that an “expert” (or at least an experienced) arbitrator will decide what the facts “really” are and will know how those facts fit in with the words or your lease or other agreement, will encourage people to resolve the dispute between themselves.

We’re not going to suggest any particular “how to arbitrate” language for inclusion in an agreement. The outfits that provide those services have such language on their websites. What we do suggest is that agreements include a section with such an arbitration provision. We also suggest that the agreements clearly say that arbitration is to be employed only where expressly called for in the agreement and not for resolution of any other disputes. And, with all of that done, Ruminations suggests that the words: “Disputes arising out of this Section are to be resolved by arbitration pursuant to Section ‘X’” be inserted wherever it makes sense to employ arbitration. The bottom line is that it isn’t an all or nothing issue.

What do you think?

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Comments

  1. Ira, happy holidays. What a timely article, as I was going to suggest you write something about the benefits of mediation, which is where everyone should start before considering either arbitration or litigating.

    My career experience in portfolio leasing and asset management (for both retailers and landlords) was highlighted by the successful resolution of many hundreds of disputes, large and small. While filing lawsuits was inevitable in some cases, I always found a way to negotiate a resolution before trial, often restoring relationship and adding value in the process.

    Mediation makes this result possible, while arbitration diminishes chances for a mutually acceptable resolution.

    I advise clients to delete arbitration clauses from leases and add mediation provisions. Arbitration is no different than court in the big ways–it is expensive and the parties lose control of the outcome.

    Mediation actually empowers parties; it restores their voice in the negotiation process through the neutral mediator’s assistance. Loss of this voice once litigation commences is the biggest obstacle to peaceful and productive dispute resolution.

    Please note that mediation does not preclude arbitration. Sometimes a mediation converts into an arbitrated result, or the parties agree to proceed to arbitration, which will be more effective (and satisfying) if it is used as the “last resort” option.

    Mediate first! It’s private, enormously flexible and the parties retain control. At it’s heart, it is about building and/or restoring relationship, which is at the very heart of collaborative landlord-tenant deals, the life blood of our industry.

  2. Dan Sheridan says:

    Ira –

    Good stuff as usual. I agree with the last comment – I usually provide for a “binding mediation” (i.e. I make it a pre-condition for litigation). If the parties choose to submit all or part of their dispute to arbitration following that process, they are free (but not bound) to do so.

    In very limited circumstances with very limited issues (e.g. a dispute over “fair market rent”), I will sometimes provide for arbitration. Usually it’s just to get over the final hump (as in two market appraisals being more than xx% apart), and very limited in scope. I only mandate it when everyone agrees that it make no sense at all to engage in a traditional judicial process.

    Thanks for raising the topic.

  3. Henry Pharr III says:

    Ira – I agree with Dan and Roger – very timely post. My experience has been that arbitration is likewise helpful only in limited situations where there is complex/specialized subject matter and two or more parties who have a heck of a lot to lose or gain in a dispute. From a lease drafting perspective I routinely strike global arbitration clauses unless Landlord and Tenant anticipate the need for an expert decision on issue(s) during the lease term. In lease and other commercial litigation my experience over and over has been the arbitrator splits the baby, which often leaves everyone unhappy and angry at their counsel. In addition, if AAA Arbitration rules and procedure and FEES are required by the arbitration clause, this often leads to upside down results where even the “winning” party loses because of legal and administrative costs. Like Roger, I find mediation to be the best tool to resolve cases large and small. Often a skilled mediator can bring a more timely and valuable result to the dispute than a panel of arbitrators.

  4. Hi Ira Thanks for bringing up some important issues regarding selection of arbitration (or mediation or med/arb etc) as a substitute for litigation in resolving disputes arising in commercial real estate transactions. As an AAA commercial arbitrator, a professor of a course in Arbitration for Transactional Attorneys and as one performing empirical research supporting your theory that transactional attorneys do not understand arbitration, I will make a few comments:

    The goal of arbitration is to achieve an award that is ‘fair and just,’ rather than one that is legally correct (whatever that is). It helps that the arbitrator knows commercial real estate law and practice. This is often better than having a former judge or litigator, who is ensconced in litigation techniques, pre trial practices etc. Therefore, I believe that selecting an ‘expert’ arbitrator is essential in all arbitration.

    As an expert witness in cases involving commercial transactions, I know how costly in terms of time and money it may be to educate the judge in commercial cases and practice. When the arbitrators, or one of them, is experienced and knowledgeable about the type of dispute, all is better.

    As for discovery, because the goal of arbitration is getting to the truth, I let in some discovery to “protect” the final award from attack. Yet, litigators who are experienced in trial work may not adapt well to the rules of the arbitration where less is done pre trial/pre hearing than in traditional litigation. Part of my role as arbitrator is to manage the case, including pre hearing meetings, discovery, motions.

    I manage my arbitration cases and try to respond to the particular circumstances so that I am in a position to make the award.

    You and I disagree about the role of the transactional attorneys in drafting the arbitration clause. Often too little attention is given to selecting the precise rules that the parties want to use in a dispute that (hopefully) will never occur.

    For example, AAA has Commercial Arbitration Rules, Consumer Arbitration Rules and Expedited Arbitration Rules on its webpage. When one selects AAA as the service provider, the party is selecting a subset of rules of civil procedure and evidence that will be binding. Will the arbitration be confidential? Will the rule of law apply? Which rules? Will the arbitrator provide reasons for her AWARD? (generally no). Will there be any appeal rights? (generally, they are very limited). The arbitration contact is part of the transactional agreement. It provides pre dispute at the beginning of the relationship what rules will apply. It is critical that the attorneys drafting such agreements understand and negotiate such provisions to meet their clients’ needs.

    I am interested to learn of others experiences with the process.

    Cheers for a wonderful New Year.

    Celeste Hammond, John Marshall Law School, Center for Real Estate Law , 7hammond@jmls.edu

  5. Good overview, Ira. As someone who used to be a real estate “litigator,” then became a commercial transactional and leasing lawyer, then added back some family law litigation and ADR (not that the famlaw is very relevant to my point), what I feel you missed in assessing the pro- and con-arbitration views is the nature of the decision itself, and the perception, if not the fact, that arbitration tends to “split the baby” rather than decide “yes or no” to a situation. Depending on the subject matter of the issue, that could be good or bad (if you agree it’s even true, though most of my litigation colleagues — and I — believe there IS a strong tendency in arbitration toward “the middle”), but it probably should come into a conversation about whether or not to include an arbitration clause in a contract.

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