As a mechanism for alternative dispute resolution, arbitration has many advantages for California businesses. Serious consideration should be given to including arbitration clauses in all California contracts.

What is Arbitration?

Arbitration is an out-of-court process for settling disputes that might commonly be litigated in a courtroom. Instead of a judge and/or a jury, the case is heard before an arbitrator. Instead of a courtroom, the physical venue is more of a conference room. Instead of being run and organized as a public governmental function, arbitration is provided through private non-profit organizations. The most commonly used organization is the American Arbitration Association (“AAA”).

Advantages of Using Arbitration

In general, arbitration clauses discourage small-scale litigation and give significant advantages to a California business that uses arbitration on a regular basis. This is one reason why many arbitration clauses are being added to consumer contracts, and this is one reason why California is trying to curtail such arbitration clauses. See here, for example.

Arbitration discourages consumer and class-action type litigation because of:

• Higher upfront costs; and
• High ongoing costs/fees.

The administrative fees for filing with the AAA start at $750. The maximum fee for starting litigation in the San Diego County Superior Court is $435. Not too much of a difference. However, compensation for the arbitrator is not included as part of the administrative fees charged by the AAA. Rather, the parties are billed ongoing fees to pay the arbitrator’s compensation. You will not get your “day in court” if you fail to pay your share of compensation fees. Such fees are in addition to other more normal litigation costs like depositions, transcripts, expert fees, etc.

Other advantages of arbitration include:

• Non-appealability: Courts will not overturn arbitration decisions absent limited circumstances;
• Secrecy: Arbitration decisions are not published; no reasons are given for whatever award is made;
• Smaller pool of attorneys familiar with/experienced at arbitrations;
• Speed: Most arbitrations are completed within less than a year; superior court litigation can take years and then can be appealed for years;
• Less expensive overall: Quicker decision means fewer attorney billable hours; non-appealability means the same (see our discussion here);
• On average, the pool of arbitrators is more conservative, pro-business than the pool of judges found in the superior courts; and
• Limited discovery by comparison to what is allowed in regular courts

When arbitrating, the parties have input with respect to who is chosen to arbitrate the case. In general, a short list of available arbitrators is provided and the parties rank the list. The list is comprised of judges and attorneys and sometimes law professors who have experience in various fields. For example, if you are arbitrating something related to aircraft design or failure, then the AAA will provide a list of arbitrators with experience in aviation litigation. If one or more of the proposed arbitrators is mutually acceptable to the parties, that arbitrator is assigned to the case.

In addition, because of the secrecy rules, these self-selection rules can provide a significant advantage to businesses who arbitrate regularly. These “regulars” often know how a given arbitrator has ruled in past cases, which allows such “regulars” to avoid, or promote, a given arbitrator. Arbitration avoids the random selection found in the superior courts.

Contact San Diego Corporate Law Today

If you would like more information about adding arbitration clauses to your business contracts, contact attorney Michael J. Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has extensive experience in drafting arbitration agreements and provisions. Mr. Leonard can be reached by email or by calling (858) 483-9200.

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