The precise origin of arbitration as a means of dispute remains unknown.[1] Within the Anglo-Saxon legal tradition, some scholars attribute the rise of extra-judicial dispute adjudication to English merchant guilds and their regulation of trade disagreements.[2] For the early American colonies, arbitration was a fairly common practice, with George Washington occasionally serving as arbitrator for private disputes.[3] Colonial-era merchants favored arbitration for a simple reason: it promised to be more efficient and cost effective than litigation.[4] Many modern corporations cite the same reason when choosing arbitration, but the rising costs and increasing length of proceedings has begun to cast doubt on whether this promise holds true for modern arbitration.
There are different reasons why a modern party may prefer arbitration to litigation.[5] However, the lower assumed cost is frequently cited as one of arbitration’s key advantages over litigation.[6] It seems paradoxical, therefore, that the main critique of modern arbitration is its excessive costs and duration, which can occasionally exceed those of litigation.[7] The question of whether arbitration is more efficient and cost effective than litigation can be difficult to quantify, given the unique facts of every case and the zero-sum nature of choosing between the two dispute resolution forms. However, there is merit to the critique that the cost of arbitration is on the rise.[8] Given the inherent customizable nature of arbitration, the issue of rising costs and duration lies not in the form of arbitration itself, but how parties use it.
Mitchell L. Marinello, who has served as an arbitrator with the American Arbitration Association (“AAA”), explains that arbitration, theoretically, has “natural cost advantages over litigation.”[9] These advantages include, among others: permitting less discovery, eliminating the majority of pre-trial motions, simpler requirements for evidence presentation, and greater finality due to the limited bases for appeal.[10] Arbitration is becoming less efficient because firms and clients are no longer taking advantage of these mechanisms. In fact, the modern approach to arbitration “often mutates into a private judicial system that looks and costs like the litigation it’s supposed to prevent.”[11] What was traditionally a simplified dispute resolution procedure now frequently includes costly and time-consuming motions, briefs, discovery, and expert witnesses.[12]
This argument is further supported by the fact that the institutional costs of arbitration constitute a relatively low percentage of the overall cost. For example, the International Chamber of Commerce (“ICC”), an international arbitration institution in Paris, reported that on average, 82% of the cost of arbitration stems from “the presentation and defense of the case.”[13] The ICC, as well as many other arbitration institutions, allows parties significant flexibility to decide on the procedural rules for their arbitration.[14] This means that to whatever extent arbitration proceedings are increasing the overall cost and length of arbitration, it is because the parties have chosen to allow it.
Several prominent arbitration tribunals have amended their rules in an attempt to address these costly procedural methods.[15] The changes range from obligations to establish a timetable to a more general requirement that parties conduct the proceedings in an efficient and expeditious manner.[16] However, these changes are unlikely to have much impact because parties to arbitration still largely set the terms for the conduct of their own proceedings. As such, the parties themselves are in the best position to reduce the cost of their own arbitration. If corporations and their counsel can resist their litigious instincts, they will likely see improvements in cost and speed. The inefficiencies of modern arbitration are a result of practice, not process.
[1] Earl S. Wolaver, The Historical Background of Commercial Arbitration, 83 U. Pa. L. Rev. 132, 132 (1934).
[2] Id.; See also K. Noussia, Confidentiality in Commercial Arbitration 11-12 (13th ed. 2010).
[3] Noussia, supra note 2.
[4] Id.
[5] See Id. (listing examples such as a desire to maintain secrecy, the attraction of using industry experts as arbitrators, flexible procedures, and the preservation of business relations, among others).
[6] Daniel E. Gonzales, Maria Catalina Carmona & Roland Potts, Controlling the Rising Costs of Arbitration, Financier Worldwide Magazine (Oct. 2014), https://www.financierworldwide.com/controlling-the-rising-costs-of-arbitration/#.WeFndmhSzIV.
[7] See Joseph R. Profaizer, International Arbitration Now Getting Longer and More Costly, Nat’l Law J. (Jul. 28, 2008), available at https://www.paulhastings.com/docs/ default-source/PDFs/9833309df69233464288 11cff00004cbded.pdf; Thomas J. Stipanowich, The College of Commercial Arbitrators Protocols for Expeditious, Cost-Effective Commercial Arbitration, 1-2 (2010), available at http://apps.americanbar.org/ litigation/committees/corporate/docs/2011-cle-materials/10-Prevent-the-Runaway/10c-protocols-expeditious.pdf.
[8] See generally, Gonzales, supra note 6; Stipanowich, supra note 7.
[9] Mitchell L. Marinello, Protecting the Natural Cost Advantages of Arbitration, American Bar Association: Litigation News (2008), https://apps.americanbar.org/ litigation/litigationnews/practice_areas/corporate_naturalcost.html.
[10] Id.
[11] Todd B. Carver & Albert A. Vondra, Alternative Dispute Resolution: Why It Doesn’t Work and Why It Does, Harv. Bus. Rev. (May-June, 1994), https://hbr.org/1994/05/alternative-dispute-resolution-why-it-doesnt-work-and-why-it-does.
[12] Id.
[13] Press Release, Curtis, Mallet-Provost, Colt & Mosle, How to Reduce the Time and Cost of Arbitration (June 6, 2014), http://www.curtis.com/pix/announcements /pridaenglish.pdf.
[14] See Id.
[15] Press Release, Norton Rose Fulbright, New Arbitration Rules Make Arbitration More Efficient and Arbitrators More Accountable (Sept. 10, 2014), http://www.nortonrosefulbright.com/knowledge/publications/120898/new-arbitration-rules-make-arbitration-more-efficient-and-arbitrators-more-accountable.
[16] Id.
