The Realities of Arbitration (Perspective)

Editor’s Note: This article is the latest installment in a recurring series in which Cravath partner David R. Marriott will write on topics of interest to in-house and outside counsel in partnership with a GC co-author.

Attila the Hun is said to have instructed: “never arbitrate.” Contrary to the view of one of history’s most infamous figures, in the modern world, arbitration can be the right choice in the right case and under the right circumstances. It can lead to a quicker resolution of a dispute, it can be less costly than litigation, and it can allow for disputes to be resolved by a party with expertise in the subject matter of the controversy.

Not infrequently, however, litigation is the better choice. Depending on the circumstances, litigation can be reasonably cost effective, allow for a right to appeal which arbitration typically does not, and permit outcome-determinative discovery not available in arbitration.

While it is often not possible to determine in advance whether a particular matter is better suited for litigation or arbitration, the following considerations may recommend resort to arbitration:

Forum of dispute. A transaction may relate to business in a country in which you question whether the rule of law applies. You may disfavor a particular forum, for example, because judicial verdicts may be difficult to enforce there or because you believe the rules of civil procedure in the forum are too constraining or complicated. In such cases, arbitration may be the right choice. Arbitration allows the parties to pick the location and rules to govern the arbitration in advance.

Confidentiality. Some deals and potential disputes concerning those deals require confidentiality. Arbitration can be beneficial in such cases as it allows for disputes to be resolved in private, outside the public forum of a courtroom. While parties may enter confidentiality agreements during the course of litigation, there will still be a public record of the dispute and the court’s decision will almost always be public.

Nature of the transaction. In some industries, it has been argued that arbitration may be the preferred method of dispute resolution, where a contract concerns a subject matter that is highly technical or unique to a particular industry. In an arbitration clause, the parties can specify a particular arbitrator or group of potential arbitrators who have expertise in the area at issue. While some courts have judges who focus exclusively on commercial cases, you will not usually have the ability to pick a judge with expertise in the precise industry or area of controversy in a litigation.

Enforcement. Internationally, arbitral awards may be more easily enforced than court judgments. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards is a multilateral agreement that was adopted in 1958. With some 156 contracting states, the New York Convention provides for widespread enforcement of awards throughout the world. Courts of contracting states are required to recognize agreements to arbitrate and enforce arbitral awards made in other contracting states. By contrast, there is no equivalently expansive international multilateral convention for the enforcement of court judgments. If international enforcement is a concern, then arbitration may well be preferable.

Need for Injunctive Relief. Arbitration may not be the vehicle of choice for parties concerned about obtaining interim injunctive relief. Problems can arise both with respect to enforcing arbitrators’ awards of interim injunctive relief and in obtaining interim injunctive relief from courts to preserve the parties’ status quo pending arbitration. While final injunctive relief may be enforced under both the Federal Arbitration Act and New York Convention, non-final interim awards may not be enforced. Moreover, in the absence of the parties’ agreement in a dispute resolution clause that interim relief may be sought in courts pending arbitration, courts have been split as to whether they may grant interim injunctive relief to preserve the parties’ status quo in anticipation of arbitration.

Labor Considerations. In the United States, certain kinds of agreements to arbitrate that seek to bar class action suits may be unenforceable under the Federal Arbitration Act. In January 2017, the Supreme Court decided to review cases on appeal from the Courts of Appeal for the Fifth, Seventh and Ninth Circuits that considered the legality of arbitration agreements in employment contracts with individual employees that purported to bar them from bringing class actions in court. In split opinions, the Second, Fifth and Eighth Circuits held that class and collective action waivers did not violate the National Labor Relations Act (and were therefore enforceable); while the Seventh and Ninth Circuits disagreed and held that such waivers were violative. The Supreme Court has yet to hear argument on this matter.

In the modern world, it is well-accepted that arbitration can offer unique benefits, given the right circumstances. You may not always know what those circumstances are in advance, but by identifying markers that point to arbitration as the preferred forum, you will be better equipped to make a decision and more likely to reach a positive outcome.

Michelle H. Browdy is Senior Vice President, Legal and Regulatory Affairs, and General Counsel at IBM. David R. Marriott is a partner in the Litigation Department of Cravath, Swaine & Moore LLP.