Part One: Reflections on the State and Future of Commercial Arbitration

Professor Thomas Stipanowich recently completed a landmark survey regarding the evolution of commercial arbitration in both U.S. and international business disputes. The results of the wide-ranging survey are examined more fully in two forthcoming scholarly articles. In “Reflections on the State and Future of Commercial Arbitration: Challenges, Opportunities, Proposals,” Professor Stipanowich draws “on data from the first broad-based survey of experienced arbitrators, conducted in 2013 by the Straus Institute, and other empirical studies,” to offer readers “new information and insights on many different aspects of commercial arbitration practice in the U.S. and in international disputes.”

In a companion piece entitled, “Arbitration in Evolution: Current Practices and Perspectives of Experienced Arbitrators,” Professor Stipanowich and Straus Institute for Dispute Resolution Research Fellow Zachary Ulrich provide a detailed summary of data gleaned from the survey to which 134 members of the College of Commercial Arbitrators (“CCA”) responded.

The following series of blog posts will highlight different aspects of the two research papers. Here is the first installment:

In Part I of “Reflections on the State and Future of Commercial Arbitration: Challenges, Opportunities, Proposals,” Professor Stipanowich “explores and suggests ways of coming to grips with the habits and attitudes of business users and counsel that create barriers to the use, or effective use, of arbitration.” Such barriers often include:

(a) risk-aversion by business clients and counsel, coupled with counsel’s desire for maximal control; (b) user inexperience, or lack of positive experience, with arbitration, coupled with recent “bad press” for arbitration; (c) the strong litigation orientation of outside counsel and (d) the failure of users to take advantage of available choices before and during the onset of disputes.

In his publication, Professor Stipanowich proposes a number of options to help participants overcome barriers to making effective choices during the commercial arbitration process such as:

1. Promote the value of arbitration as a choice-based process that may be tailored to specific business goals and priorities. Provide specific guidance to business users and counsel regarding key choice points pre-dispute (drafting agreements) and post-dispute.
2. Capture and publish key statistics and case studies on key procedural options, including “success stories” as well as cautionary tales. [and]
3. Develop materials and videos on the benefits of commercial arbitration for companies, law firms, business schools, first-year contracts classes, and ADR survey courses.

In Part II of his article, Professor Stipanowich responds to “concerns that arbitration is a risky, uncertain ‘crap shoot’ in light of the relative absence of appeal, the possibility that arbitrators will fail to follow and properly apply the law, and the notion that arbitrators inappropriately “split the baby” in their awards.” In addressing such concerns, Professor Stipanowich discusses potential responsive action items:

1. Educate business users and counsel regarding facts about arbitrator decision-making.

If there is one clear insight to be garnered from the CCA/Straus Institute Survey, it is that many experienced arbitrators in the U.S. are serious about their perceived obligation to render an award in accordance with applicable law. As illustrated by Table 5, respondents nearly all always or usually “do [their] best to ascertain and follow applicable law” in the absence of a contrary agreement between the parties, and “carefully read and reflect upon legal arguments and briefs presented by counsel.” Many encourage briefing on legal issues. These insights should be conveyed to users through educational programs; some arbitrators may feel comfortable stating their general intention to follow applicable law in the absence of an agreement to the contrary in statements on their websites.

2. Encourage business users and counsel to make sure the standards applicable to arbitral awards in the agreement (including incorporated rules) fairly represent the expectations of the parties. Promote dialogue between arbitrators and other stakeholders regarding the interplay between legal norms and notions of “equity and fairness.”

The Survey indicates that at least occasionally, some arbitrators ignore applicable law in favor of their “own sense of equity and fairness” in making an award. As discussed above, parties should be encouraged to consider whether the language in their agreement to arbitrate (including incorporated arbitration procedures) fairly reflects the norms they intend for the arbitrators to follow.

Moreover, there is clearly a need for a new dialogue between arbitrators and other stakeholders regarding the ways in which legal norms interact with concepts of equity and fairness. In the present environment, arbitrators should acknowledge an ethical obligation to understand and clarify parties’ expectations regarding the norms governing their award.

3. Provide guidance regarding options for those who desire enhanced certainty or minimized risk, including:

a. publication of a supporting rationale;
b. multi-member tribunal vs. sole arbitrator;
c. final-offer arbitration, bracketed arbitration;
d. contractual provisions for expanded judicial scrutiny;
e. appellate arbitration.

A number of options exist for those who seek additional protections against awards that are extreme, irrational, or founded on errors of law or fact. In developing guidance regarding such options, effort should be made to reflect upon the relative merits, risks and potential unintended consequences of each option, some of which were addressed above. For example, contractual provisions for expanded judicial scrutiny may be legally enforceable in a few jurisdictions, but the potential costs and risks of such “hybrids” have led many experienced attorneys to reject such options.217 Generally speaking, if business clients are dead set on having arbitration and rights of appeal on the merits, appellate arbitration pursuant to published procedures of a recognized institution is likely to be a much safer and more practical option; if they could be persuaded to offer more specific information regarding the use and operation (number of appellate arbitrations conducted, cycle time, user evaluations) of their appellate systems, arbitration service provider institutions could promote much greater awareness of appellate arbitration.

For more information, please read Professor Stipanowich’s guest blog post about the survey or his full article.

Photo credit: Colin_K / Foter / CC BY