Oklahoma Bar Journal
Maximizing the Benefits of Arbitration
By R. Carson Fisk
Arbitration offers many advantages over traditional litigation. Efficiency and cost-savings are often cited as the primary benefits, with a fair arbitration hearing being viewed as a shortcut to substantial justice. However, such concepts over-generalize the benefits arbitration can provide and are merely potential effects of the greatest value arbitration has to offer: control of the process placed in the hands of the end-users. It is this aspect of control that fully distinguishes arbitration from litigation.
CONSIDERATION REGARDING APPLICABLE RULES
Depending on one’s perspective or negotiating leverage, arbitration is often chosen – or accepted – with reference to an administering body, such as the American Arbitration Association, JAMS or CPR. These entities have a variety of distinct rules that apply to different types of disputes, including general commercial, construction and employment.1 These rules, when referenced in an arbitration agreement, are generally viewed as extensions of that agreement – provisions that are incorporated by reference. They effectively serve as a gap-filler, setting a detailed and time-tested process and structure for the arbitration that the parties can rely on and do not have to create. Even in nonadministered arbitration, the question of how various procedural matters will be addressed will inevitably arise. It is worth giving thought at the contract drafting stage and the outset of a case as to whether it would be beneficial to modify applicable rules or add to them where they fall silent.
QUALIFICATIONS OF THE ARBITRATOR
Having a voice in the selection of the arbitrator – who decides the outcome of the case – is one of the principal and unique benefits of arbitration. There generally is no equivalent in litigation. Even if one were to utilize a forum selection clause or engage in the disfavored practice of forum shopping, it is often difficult to ensure that a particular judge hears a case. However, an arbitrator can be identified who has a particular skill set, knowledge or experience regarding the subject matter at issue or possesses other qualifications or traits. This can eliminate or reduce the need to present basic information at the hearing, thus saving the parties time and associated costs. Further, the selected arbitrator may offer a specific perspective that a more randomly appointed decision-maker might not possess. Additionally, it is common in cases above a threshold dollar amount for there to be an arbitration panel or tribunal generally consisting of three arbitrators. This allows for a greater range of experience and knowledge – and lessens the impact that a “rogue” arbitrator might otherwise have. There is no equivalent in trial-level litigation.
The Uniform Arbitration Act, as adopted in Oklahoma, vests a court with the power to appoint an arbitrator, with no requirements or limitations as to any qualifications.2 The rules of various administering bodies typically provide for the selection of arbitrators from general or specialized panels or rosters and often adopt a process by which the parties rank potential arbitrators.3 But parties can define or refine the process. For example, it might be contractually required that the arbitrator maintain a certain license, focus in a particular field or area of practice, have a certain number of years of experience with the subject matter of a given dispute or have sector-specific or technical knowledge within an overarching industry. The options are limited only by the imagination. Such requirements become binding as part of the arbitration agreement and will be enforced.4
ARBITRAL DECISION MAKING
Arbitrators generally render substantive decisions under a model containing three extreme points: 1) strict application of the law without any consideration to a contrary result otherwise required by the contract, 2) equity related to the outcome and 3) strict application of the contract without any consideration as to a contrary result otherwise required by substantive law. Practically speaking, decisions may be made primarily relying on one approach as may be tempered by another. For example, the contract language could be strictly applied with subjective concepts of fairness being given due consideration. Similarly, concepts of fairness could be applied with some degree of deference given to the law.
The preferred approach can be – but often is not – identified in the applicable arbitration agreement. The laws supporting the use of arbitration are generally silent on the application of the law, as the Federal Arbitration Act and the Uniform Arbitration Act do not mention the role of substantive law in arbitral decision-making. Left unaddressed, the standard may be set by the rules of any administering body, which often vary.5
If the parties choose to establish the decision-making process to be utilized by an arbitrator, this would typically occur at the pre-dispute stage, likely during contract negotiations. By contractually defining the concepts to be utilized by the arbitrator, the parties avoid any ambiguity on the matter and prevent any potentially undesirable default standards from applying. But setting a decision-making standard is of value only if it is utilized. Faith may be placed in the arbitrator to abide by the parties’ intent as reflected in the applicable agreement, or the agreement may be drafted to effectively require the arbitrator’s compliance under the threat of vacatur due to the arbitrator exceeding his or her powers, although the enforceability of such threats may be subject to further legal debate.6
To avoid end-user dissatisfaction, consideration should be given to drafting and negotiating arbitration agreements so all involved parties, including the arbitrator, understand the standard to be employed in rendering decisions. Further, it should be determined whether the arbitrator is to be trusted to use that standard voluntarily or should be compelled to use it and whether any adjustments to the contractual language are needed. The parties can receive great value if they take proper care to negotiate the decision-making standard up front and to select an arbitrator who will uphold the parties’ intent.
PROCESSES FOR EXCHANGE OF INFORMATION
It is the discovery process or, more appropriately in arbitration, the exchange of information that often drives up the cost of litigation and arbitration.7 In a survey conducted over an approximate three-year span, the American Arbitration Association collected 422 surveys from arbitrators related to cases with a median claim amount of approximately $2.5 million. The resulting white paper notes, with respect to discovery:
Arbitrators reported that most of the arbitration agreements did not address discovery and therefore did not impose a time limit on or restrict the type of discovery allowed. Still, about 25% of the arbitration clauses limited discovery to the exchange of documents. In the other direction, a small but significant percentage of the arbitration clauses (just under 10%) provided for the same kind and extent of discovery as was available in court litigation. Arbitrators reported that, even when the arbitration clause limited discovery, in the majority of instances (57%), the parties in the arbitration agreed to expand discovery beyond those limitations.
In nearly all cases, discovery involved the exchange of documents. The survey showed that depositions also were common and took place in nearly two-thirds of the reported arbitrations (66%). Discovery frequently included the deposition of either experts or non-parties (40% of cases). Interrogatories were relatively unpopular, being used in less than 20% of the reported cases. Discovery disputes happened often, however, with arbitrators ruling on discovery disagreements (whether brought by written motion or orally) in about 70% of the cases.8
As noted above, attorneys have a tendency to gravitate towards what is familiar, often including litigation concepts in the arbitral context. Parties may prefer to have at their disposal all of the discovery-related tools made available under the Oklahoma Discovery Code.9 But the opportunity to control the exchange of information process should not be overlooked. In arbitration, certain discovery tools may be ignored, limited or expressly eliminated, with requests for admission and interrogatories often falling by the wayside. Similarly, depositions may be unavailable or subject to aggregate or deposition-specific limits on time or the number of depositions available. Expert-related discovery may be limited to the exchange of reports. Other limits may be warranted as well. Once again, limitations that translate into cost-savings are limited only by the imagination.
LIMITS ON ARBITRAL POWER
As the source of the arbitrator’s power, “[t]he parties’ agreement may give the arbitrator broad power, and it may confine and limit the arbitrator’s power,” and the arbitrator “has the obligation to effectuate the intent of the parties’ agreement.”10 An arbitrator’s attempt to utilize authority that has been expressly denied to him or her – or to refuse to enforce a power granted to him or her – will subject the award to vacatur.11
Contracts may contain limits on certain types or amounts of damages or costs recoverable by a party and, generally, such contractual terms are generally legally enforceable.12 However, arbitration agreements may be drafted in a way to give further effect to such provisions by framing them as limits on the arbitrator’s power. Additionally, where an arbitrator is contractually denied the power to award certain types of relief (e.g., equitable, declaratory, etc.), which may be permitted under the rules of various administering bodies, the arbitrator can be expected to abide by that denial of power and not include such matters in his or her award.
RECOVERY OF ATTORNEY FEES
Under Oklahoma law, a litigant’s right to recover attorneys’ fees is governed by the “American Rule,” which provides that courts generally may not award attorney fees in the absence of a specific statute or a contractual provision allowing for such recovery.13 There are, however, exceptions, including claims related to breach of contract.14 The underlying logic for these exceptions would appear to be that a prevailing party should be compensated for the cost of prevailing – at least as long as such costs are reasonable. Similarly, in arbitration, attorneys’ fees are often recoverable if permitted by law or contract.15 However, there are potential unintended consequences in allowing for such recovery.
A party that expects to recover its attorneys’ fees may be less inclined to keep those costs in check. When attorneys’ fees are recoverable, one focus of risk assessment is on the potential for an expanded negative result – the fact that the losing party might not only have to pay an adverse judgment or arbitration award, but also the attorneys’ fees incurred by the winning party. This increased risk may motivate parties to take a more “reasonable” position in settlement negotiations. But the prospect of such recovery may also embolden a party with the stronger position (or perceived stronger position).
Conversely, when a party has no prospect of recovering its attorneys’ fees, the party is effectively encouraged to be fiscally prudent regarding actions that are taken. When attorneys’ fees are not recoverable, either having been waived or expressed as a limit on the arbitrator’s power, the focus of risk assessment is on the merits of the dispute, without attention to added-on costs such as legal expenses. This approach can be particularly effective for early stage resolution of “smaller” disputes. However, certain parties may also be inclined to adopt harsher or unreasonable approaches as a means to gain negotiating leverage, knowing that their exposure to attorneys’ fees is lessened or nonexistent.
Ultimately, one of three different scenarios will usually apply: 1) the contract mandates or permits for the recovery of attorneys’ fees, 2) the contract is silent on the recovery of attorneys’ fees or 3) the contract bars the recovery of attorneys’ fees. There may be variants within these, including fee-shifting and caps on recovery. Whether one is a claimant or respondent, or dealing with a particularly aggressive claimant or respondent, may dictate the preferred contractual approach. However, such matters should be addressed during contract negotiations, long before any litigation has ensued and the preferred approach for any specific situation can be solidly identified.
CHOOSING THE TYPE OF AWARD
While a judgment in litigation may contain no to minimal reasoning, arbitration offers the parties various options. An arbitration award may be issued that offers no reasoning or may provide much deeper insight as to the factual and procedural background, resolution of factual and legal issues and a reasoned analysis. In arbitration, “A reasoned award is something short of findings and conclusions but more than a simple result.”16 A standard award offers the “simple result.” Findings of fact and conclusions of law, using legal principles as a guide, should offer substantial detail with general findings being insufficient.17
In general, standard awards, reasoned awards and findings of fact and conclusions of law offer different advantages and disadvantages, though it is normally more costly to have an arbitrator dedicate the time for the preparation of a reasoned award or findings of fact and conclusions of law. Standard awards generally involve less time to prepare and, by extension, are less costly. However, they offer minimal insight as to why the particular result was reached, which can be frustrating for a party who did not prevail or did not prevail to the extent expected. Given the limited information provided, they are – at least theoretically – more insulated from post-award attack, such as a motion to vacate the award.
Conversely, reasoned awards and findings of fact and conclusions of law involve more time to prepare and are more expensive. With the analysis they offer, there is often less of a question as to why a particular party prevailed. However, empowered with greater information as to why a given result was reached, a nonprevailing party may be provided with a better opportunity to seek to have the award vacated. In fact, the underlying purpose for obtaining findings of fact and conclusions of law – at least in litigation – is to permit ease of review for a higher court.18 In the absence of agreement on the matter, deciding the type of award may be left to the discretion of the arbitrator. It can, however, be directly addressed in the arbitration agreement itself. This is yet another value-add to selecting arbitration over litigation.
TIMING AND METHOD OF CONDUCTING THE HEARING
As the COVID-19 pandemic has made abundantly clear, litigation does not always proceed uninterrupted or swiftly. Shelter in place directives and other orders impacted the ability (and, in some cases, willingness) of jurors, parties, attorneys, court personnel and judges to participate in the judicial process. The necessity of striking a balance between access to courts and ensuring the health and safety of the public has required that the judicial system adapt. As a result, the Oklahoma Supreme Court directed that, “Judges are encouraged to continue to use remote participation to the extent possible by use of telephone conferencing, video conferencing pursuant to Rule 34 of the Rules for District Courts, Skype, Bluejeans.com and webinar-based platforms.”19 While it may have taken a global pandemic and disaster to prove the benefits, as well as the limitations, of remote hearings and dispute-related resolution on a large scale to those who resisted the usage of such tools, attorneys and their client are quickly learning.
Even before the pandemic, many aspects of the arbitration process were already conducted remotely. Most communications with the arbitrator and any case manager, in the case of an administered arbitration, were and are handled via email. The critical preliminary hearing, where various procedural matters are addressed and a final hearing date may be identified, was and remains generally conducted by telephone conference. Hearings on interim matters were generally conducted by telephone conference as well. While the final hearing was typically conducted in-person, arbitral rules often permitted and encouraged flexibility. For example, Rule R-33 of the American Arbitration Association’s Construction Industry Arbitration Rules provides that “[w]hen deemed appropriate, the arbitrator may also allow for the presentation of evidence by alternative means including video conferencing, internet communication, telephonic conferences and means other than an in-person presentation,” provided that “[s]uch alternative means must still afford a full opportunity for all parties to present any evidence that the arbitrator deems material and relevant to the resolution of the dispute and when involving witnesses, provide an opportunity for cross-examination.”20 The parties themselves are empowered to dispense with either an in-person or remote hearing as “[t]he parties may agree to waive oral hearings in any case.”21
This flexibility of arbitration is of particular benefit in uncertain times such as these, where the prospect of conducting an in-person trial or hearing may frequently change. Parties may select a hearing date at the outset of an arbitration and reasonably expect, assuming some degree of willingness to be flexible, the date will hold. The hearing may need to be conducted remotely, but proceeding in this private setting may not be subject to the same limitations of access that might be imposed on more public forums, such as courthouses. Thus, in many instances, it is possible to conclude a final hearing in an arbitration long before it might be possible to conclude a trial in court.
Beyond the high-level benefits arbitration offers are numerous discrete advantages over litigation that may, in many instances, go overlooked by parties when negotiating arbitration agreements or initiating an arbitration. That need not be the case. Contracting parties and their counsel would be well-served to consider nuanced points that can place greater control in the hands of the end-users. Unlike litigation, arbitration offers a fully customizable process, ranging from the selection of the governing rules and qualifications of the arbitrator to the nature of the final award. Framing the advantages of arbitration as involving merely efficiency and cost-savings, while accurate, only scratches the surface of how arbitration can be effectively utilized as not merely a shortcut to substantial justice but rather a tailored path taking into account the preferences of the contracting parties.
ABOUT THE AUTHOR
R. Carson Fisk is a shareholder in the Austin, Texas office of Andrews Myers PC, where he practices in the area of construction law and regularly serves as an arbitrator. Licensed in Texas and Oklahoma, he is board certified in construction law by the Texas Board of Legal Specialization and is a Fellow of the Chartered Institute of Arbitrators.
- See e.g. Amer. Arb. Ass’n Comm. Arb. R.; Amer. Arb. Ass’n Constr. Indust. Arb. R.; Amer. Arb. Ass’n Employment Arb. R.; JAMS Comprehensive Arb. R. & Proc.; JAMS Employment Arb. R. & Proc.; JAMS Eng. & Constr. Arb. R. & Proc.; CPR Administered Arb. R.; CPR Rules for Expedited Arb. of Constr. Disputes.
- See 12 O.S. § 1862.
- See e.g. Amer. Arb. Ass’n Constr. Indust. Arb. R. R-14; JAMS Eng. & Constr. Arb. R. & Proc. R. 15.
- See 12 O.S. § 1862 (providing that “[i]f the parties to an agreement to arbitrate agree on a method for appointing an arbitrator, that method must be followed, unless the method fails”); see also Amer. Arb. Ass’n Constr. Indust. Arb. R. R-14 (noting that the selection process only applies “[i]f the parties have not appointed an arbitrator and have not provided any other method of appointment…”).
- Compare Amer. Arb. Ass’n Constr. Indust. Arb. R. R-48(a) (providing that “[t]he arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, equitable relief and specific performance of a contract”) to JAMS Eng. & Constr. Arb. R. & Proc. R. 24(c) (providing that “In determining the merits of the dispute the Arbitrator shall be guided by the rules of law agreed upon by the Parties. In the absence of such agreement, the Arbitrator shall be guided by the rules of law and equity that the Arbitrator deems to be most appropriate. The Arbitrator shall have the power to grant any remedy or relief that is just and equitable and within the scope of the Parties’ agreement, including but not limited to specific performance of a contract or any other equitable or legal remedy”).
- See Hall St. Assocs., L.L.C. v. Mattel, Inc., 128 S. Ct. 1396, 1405, 170 L. Ed. 2d 254 (2008) (holding that the “national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway” warranted barring expanded judicial review of arbitral awards under the FAA); Wells Fargo Bank v. Apache Tribe of Oklahoma 2016 OK CIV APP 68, ¶ 10, 384 P.3d 145, 148 (concluding that “[p]rivate parties may not contract for expanded judicial review [of arbitral awards] when the strict confines of the Federal Arbitration Act apply to the arbitration proceeding and award”); Forest Oil Corporation v. El Rucio Land and Cattle Company Inc., 518 S.W.3d 422, 432 (Tex. 2017) (holding that, under Texas law, “[i]n the absence of a clear agreement to limit the panel’s authority and expand the scope of judicial review, this Court may not exercise expanded judicial review….”).
- See e.g. American Arbitration Association, Parties and Counsel: Make Commercial Arbitration More Efficient, Less Expensive (available at www.adr.org).
- American Arbitration Association, Parties and Counsel: Make Commercial Arbitration More Efficient, Less Expensive (available at www.adr.org).
- See 12 O.S. §§ 3230, 3231, 3233, 3234, 3236 (providing for various discovery tools, such as oral depositions, depositions on written questions, interrogatories, the production of documents, and requests for admission).
- Sooner Builders & Invs., Inc. v. Nolan Hatcher Constr. Servs., L.L.C., 2007 OK 50, ¶ 24, 164 P.3d 1063 1071 (citing Alexander v. Gardner–Denver Co., 415 U.S. 36, 53 (1974)).
- See 12 O.S. § 1874(A)(4); see also Sooner Builders & Invs., Inc. v. Nolan Hatcher Constr. Servs., L.L.C., 2007 OK 50, ¶¶ 24-25, 164 P.3d 1063 1071-1072 (holding that an arbitration award was properly vacated where the parties’ agreement mandated an award attorney fees the prevailing party but the recovery of such fees was denied).
- See Fretwell v. Prot. Alarm Co., 1988 OK 84, 764 P.2d 149, 152 (holding that a contractual provision limiting damages to a set amount was enforceable); Elsken v. Network Multi-Family Sec. Corp., 1992 OK 136, 838 P.2d 1007, 1010 (recognizing that if parties are not in an unequal bargaining position, a limitation of liability as to the amount of damages recoverable is generally binding and enforceable); Dollar Rent-A-Car Sys., Inc. v. P.R.P. Enters., Inc., No. 01-CV-698-JHP-FHM, 2006 WL 1266515, at *21 (N.D. Okla. May, 8, 2006) (concluding that defendants were contractually precluded from recovering lost profits or consequential damages).
- See Barnes v. Oklahoma Farm Bureau Mut. Ins. Co., 2000 OK 55, ¶ 46, 11 P.3d 162, 178-179.
- See 12 O.S. § 936 (identifying a variety of claim where attorneys’ fee may be recovered).
-  See e.g. Amer. Arb. Ass’n Constr. Indust. Arb. R. R-48(d); JAMS Eng. & Constr. Arb. R. & Proc. R. 24(g).
- House v. Vance Ford-Lincoln-Mercury Inc., 2014 OK CIV APP 36, ¶ 24, 328 P.3d 1239, 1246 (quoting Holden v. Deloitte & Touche LLP, 390 F.Supp.2d 752, 780 (N.D.Ill.2005)).
- See 12 O.S. § 611 (providing that “[u]pon the trial of questions of fact by the court, it shall not be necessary for the court to state its findings, except generally, for the plaintiff or defendant, unless one of the parties request it, with the view of excepting to the decision of the court upon the questions of law involved in the trial; in which case the court shall state, in writing, the findings of fact found, separately from the conclusions of law”); Messinger v. Messinger, 1958 OK 296, 341 P.2d 601, 604 (noting that “[t]he object of the statute [12 O.S. § 611] is to enable the parties to have placed on the record the facts upon which the rights litigated depend, as well as the conclusions of law which the court drew from the facts found, so that exception may be taken to the views of the trial court as to the law involved in the trial”).
- See Weavel v. U.S. Fid. & Guar. Co., 1993 OK CIV APP 4, 848 P.2d 54, 59 (noting that “[t]he trial court is bound to make findings of material fact in sufficient detail for a correct decision of questions of law involved in the case in the event the action is reviewed by a higher court”).
- Third Emergency Joint Order Regarding the COVID-19 State of Disaster (SCAD No. 2020-36) (April 29, 2020).
- Amer. Arb. Ass’n Constr. Arb. R. R-33(c).
- Amer. Arb. Ass’n Constr. Arb. R. R-33(d).
Originally published in the Oklahoma Bar Journal -- OBJ 91 No. 9 (November 2020)