The Arbitration Debate

“Arbitration clauses frequently come up when two entities are getting together to share or develop a business idea. It’s ‘How do we get divorced?’ basically, if we decide it’s not going well,” explains Wade Wacholz, managing partner of Gislason & Hunter.

If a pre-dispute arbitration agreement exists, the path is predetermined and features no detours. If no such clause has been composed, there are several key questions to answer and issues to consider when deciding between arbitration and litigation.

•Are you willing to give up procedural protections? “Arbitration tends to be a much looser process [than court proceedings],” Holstein says. “I believe that more evidence is going to be admitted in an arbitration. There are going to be fewer safeguards, like the hearsay rule and others that are there in the courts as a matter of steering the proceeding away from being a free-for-all, if you will.”

Hearsay, or second-hand information, isn’t admissible in the courtroom. If you want to fortify your court case with an expert witness, that witness must testify in person and potentially be cross-examined by the opposition. In arbitration hearings, conversely, expert reports often are allowed in lieu of the actual, physical expert. “If you’re the defendant, and there is some expert who says you got a bunch of stuff wrong, then that expert has to show up in court and testify and then be subject to cross-examination. Some experts completely fall apart in cross-examination,” Broady explains. “If you’re in arbitration and the arbitrator is letting a written report go in, there’s no chance to cross-examine that expert. Even though you might think the expert would get killed on cross-examination, well, the arbitrator let the report in, those are the rules, and you’ve just lost a big procedural protection.”

•How complex is the case? According to Shroyer, arbitration is an effective tool for resolving what he terms “routine, contained kinds of disputes.” In Minnesota, for example, nearly all claims for no-fault insurance benefits are arbitrated. The discovery in such cases is typically minimal; the disputes tend to be tightly focused around the facts.

Complex, highly technical, industry-specific disputes also can be well suited for arbitration, Shroyer adds. Remember, arbitrators commonly are selected for cases based on their expertise in specific areas. Consequently, if you’re involved in, say, a dispute related to a construction defect, it likely will be far easier and more efficient to plead your case in front of an individual or panel with industry background. “The complexity of a construction-defect dispute is just a mind-boggling thing to present to a jury,” Shroyer explains. “You’ve got a general contractor, an architect, engineers, and a bazillion subcontractors all talking about industry practices and using arcane language. How are you going to present that in any efficient, intelligent way and get a meaningful output from a jury?”