Arbitration: At What Price?

May 23, 2012

Over the last several months, I have been involved in a number of cases that have been actively litigated in the courts.

As a result, I have formulated some personal opinions concerning commercial litigation. By commercial litigation, I mean actions against agents for errors and omissions; actions by agencies for enforcement of restrictive covenants; actions between agencies over contract disputes; etc. At some time or another, virtually every agency encounters controversies involving the foregoing. The issue is whether or not the controversy will result in actual litigation.

In my opinion, commercial litigation is only a matter of “last resort.” Such litigation is a time-consuming process; it is expensive; it interferes with the conduct of your business; and the results are never certain. Hence, my advice is to use litigation only as a last resort.

For years, as I have drafted commercial contracts, I have included provisions relative to alternative mechanisms for resolving disputes rather than litigation. These mechanisms may include mediation and binding arbitration. I am not the only one who does this. I am aware of a number of attorneys, carriers and agencies who have incorporated arbitration provisions into their various agreements. I think this is an excellent idea to avoid some (but not all) of the adverse consequences that arise from litigation. However, you must be very careful about utilizing mandatory arbitration clauses.

With respect to mandatory arbitration, I think the following are important elements to be considered:

1. Place of Arbitration. The place of arbitration should be convenient to the parties to the contract.  Unfortunately, I have seen some agreements between carriers and agencies whereby any disputes will be resolved by arbitration at the carrier’s home office.  This seems unfair if the carrier has a home office in, say, New York; but is admitted to transact business in Wisconsin, writes policies in Wisconsin, has branch offices in Wisconsin, etc.  In such event, it seems to me Wisconsin is the better “forum;” i.e., place of arbitration.

2. Applicable Law. Again, I have seen arbitration provisions which attempt to apply the law of a foreign state.  If the parties to the contract are performing the contract in Wisconsin, and the incident giving rise to the dispute occurs in Wisconsin, Wisconsin law should be applied.

3. Structure. Arbitration can take many forms. The contract can provide that arbitration is to be done in accordance with the rules of the American Arbitration Association (“AAA”). The contract can provide that the arbitration can be conducted in accordance with Chapter 788 of the Wisconsin Statutes. In this event, the judge will appoint a single arbitrator in most instances to resolve the dispute. The contract can also name firms who specialize in the business of dispute resolution.  Most of the urban areas in Wisconsin have these types of businesses, and their practice extends state-wide. The number of arbitrators can be anywhere from a single arbitrator to a panel of three or more. The important point for the parties to the contract is to select the method by which the arbitration can be implemented by the parties.

4. Arbitration Expense. It is assumed that arbitration will be less expensive than litigation, and I suspect that in most cases that will be true. However, that is not true in each and every case. The decision to arbitrate should also be cost-sensitive.

This article was prompted by a recent experience I had with the AAA, which turned out to be very negative. There was a dispute that arose under an employment contract between a producer and an agency. The contract provided that, in the event there was a dispute, the matter was to be resolved in accordance with the rules of the AAA, located in Chicago, Illinois.  There was nothing out of the ordinary relative to the dispute. It was simply an employment-based claim whereby the departing employee asserted a cause of action for breach of contract and recovery of unpaid benefits. As the arbitration proceedings began, I became concerned about the cost-effectiveness of the arbitration process.  Here is what I encountered. The parties had to pay an initial fee for arbitration in the sum of $4,350.00 each.  That totaled $8,700.00.  A panel of three arbitrators was selected. Following selection of the arbitrators, an additional invoice was then submitted by AAA for an additional $38,945.00 to cover the estimated cost of two of the three arbitrators, their expenses associated with a three-day hearing, plus an additional arbitration fee. This brought the cost of arbitration to a total of $47,645.00, without any consideration for the attorneys’ fees incurred by the employee or the agency or the costs of the third arbitrator. Needless to say, I was shocked! In that particular case, I concluded that arbitration was certainly not more cost-effective than litigation. Moreover, the rules of commercial arbitration limited the parties’ ability to take depositions and discovery, something litigation does not necessarily do.

My point in telling you the foregoing experience with the AAA is that, although I am a strong believer in alternative dispute resolution processes, I am very concerned about selecting the AAA as the arbitrator. Before you do so, give the matter some thought and check to see what the arbitration process would cost the parties. Use arbitration when it is cost-effective to do so.

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For more information about "Arbitration: At What Price?," contact Timothy D. Fenner at tfenner@axley.com or 608.283.6733.