I’m not a fan of arbitration, as a general rule—especially in consumer contracts.* That said, arbitration is far superior to litigation in many situations, and for many reasons.
In tort, not a good idea. Certainly not an appropriate venue for a family law dispute. And consumer contracts? Just… no. Only the vendor benefits.* But arbitration is definitely worth considering in global business and investment. All of the parties involved have the benefit of counsel—or at least, they should avail themselves of counsel—and they are sophisticated enough to recognize what it means to be bound to a decision. Or at least, they should be…
Some benefits of international arbitration:
- It’s far cheaper than litigating a dispute.
In arbitration, the parties pick the rule book. Good luck convincing Judge Haller that he should yield to your client’s preferences as to how things get done in the hearing.
- Decisions are made by specialized neutrals who are selected by the parties. Honestly, if I’m litigating a contract dispute over drilling rights in the North Sea, I would much rather have the case decided by a specialist than a former prosecutor who got appointed to the bench because he was the governor’s roommate in law school.
- Depending on the arbitral body, the process looks more like the inquisitorial system used by civil law jurisdictions. This makes enforcement far more likely in those civil law jurisdictions.
- The process garners more respect from laypersons in civil law jurisdictions, for the same reason. Consequence: they’re more willing to abide by the decision.
- Two variations on that… losing parties can be more confident that they didn’t get hometowned, and are more likely to pay on the judgment because punitives are a rarity (remember that parties choose the rulebook!).
- Sensible evidence production is more likely, again for the same reason. That is, when the arbitrator demands evidence, the parties can’t refuse without seriously harming their chances. They also won’t just throw everything into a box for the other side to sort out.
- Arbitral awards are more acceptable to foreign courts if the losing party doesn’t pay up. Awards won in U.S. litigation… much harder to enforce. [This is the big one… it’s critical that you get enforcement, lest the whole ballgame be blown.]
- We have a treaty basis for cajoling those countries who won’t enforce arbitral awards. The New York Convention on Arbitral Awards (1958) has been acceded to by just about every country we trade with.
Now, to be sure, it isn’t always the way to go. Dan Harris argues, quite lucidly and from much experience, that arbitration clauses are a waste of time in Chinese contracts. Despite China’s accession to the New York Arbitration Convention , they don’t follow through on their obligations to enforce awards. Accordingly, Dan continues, the best thing you can do in China is choose (1) Chinese courts as the venue, (2) Chinese law as the controlling doctrine, and (3) Chinese as the operative language of the contract.
But China is one country. One. And, while it’s a biggie, it still isn’t our biggest export market by a long shot. That distinction still lies with those polite, friendly folks to our north. The home of Wayne Gretzky, SCTV, and Diana Krall (with whom I am in love, much to Peggy’s amusement and unbeknownst to Elvis Costello—or Diana Krall for that matter). But I digress. Mexico buys twice as much stuff from us than the Chinese do. If you consider the European Union a single market (let’s not argue about that here, m’kay?), they beat China, too. The only reason China tops the list for total trade: we buy four times what they buy from us.
Point is, our biggest trading partners—China excepted—believe in arbitration, and their courts are far more likely to compel a losing party to pay on an arbitral award than on a verdict.
* Forced arbitration clauses in consumer contracts are sinister. Evil. Downright rude. While I can’t say that AT&T Mobility v. Concepcion was completely wrong, I do think that five of the the Nine Wise Souls dropped the ball. Setting aside all the arguments about Congress occupying the field in interstate commerce with the FAA, they should have given more weight to the policy argument that goes like this: class actions benefit society not because they make plaintiffs whole, but because they make defendants think twice about behaving badly. It makes them think twice because, (1) punitive damages are rare, and (2) the publicity of a class action is harmful to their profitability. But arbitration is usually a private affair, and damages are limited. Maltreatment of a customer by a cellphone provider, cable company, airline, (insert player from random industry here)… used to be a costly thing. Not only did the vendor have to write a large check, their clientele knew about it and judged them accordingly. Now? Individual claims only. All hush-hush. A massive waste of time for the aggrieved party, so they just suck it up and deal with it.
Not only is this not beneficial to the public, it’s harmful and it’s shameful.