Arbitration in the Corporate Context

Abstract

Those involved in corporations easily perceive the efficiency and cost advantages in arbitration over litigation. Efficiency is gained through informality of procedural and evidentiary rules, as well as limited discovery. Unlike a judge, the arbitrator or arbitration panel is selected by the parties and typically will be an expert in the relevant field, saving the costs of educating a judge or jury about the factual setting and increasing the parties’ confidence that a sensible result will be reached. Arbitration can be particularly effective when the parties have an ongoing relationship, as it avoids the entrenchment created by the adversarial stance of protracted litigation. Parties may also have a sense that any unfairness in a given arbitral award will be equalized over the life of the relationship.

Less apparent, however, is that most of these advantages have substantial negative implications as well. In the interest of speedy adjudication, an arbitral decision is normally rendered without an opinion. Experts chosen by the parties for their familiarity with the subject matter are rarely experts in the law, and in any event are not bound to follow the law at all. Though limited discovery saves time and money, it hinders a party’s ability to develop facts. This can be critically important. Furthermore, judicial review is extremely limited in scope and extraordinarily deferential to arbitrators. This lack of meaningful recourse to the courts after binding arbitration greatly increases the threat of permanent harm from repeat player bias and other fairness concerns.