Much has been written about the advantages and disadvantages of arbitration when compared to litigation. A more nuanced question is when will a party enhance its chances of success by choosing arbitration.
When I was in private practice in Manhattan, my litigation clients often asked “Are we better off arbitrating?” In making this analysis, I always considered certain factors to be preeminent.
There are cases which may have strong equitable appeal, but are weak as a matter of law. In a litigation, the court is constrained to follow the law, even if the result is unjust. An arbitrator has much more latitude to ensure that rough justice is achieved. This is especially true when a reasoned decision is not required by the arbitration clause. New York appellate courts are loathe to disturb arbitration awards, except in very limited circumstances.
By choosing arbitration, a claimant can also minimize the risk of losing on a motion to dismiss or for summary judgment. Historically, such motions have been disfavored in arbitration (although this is changing somewhat). As a result, a claimant will typically be able to try its case on the merits, rather than being shut down by motion.
Arbitration can also provide a measure of protection when the respondent has far more financial resources. Discovery is time consuming and expensive. A claimant can avoid a war of attrition, and minimize these burdens in arbitration, where depositions are not as of right, and the scope of any discovery can be limited by the arbitrator. This can also be a strategic advantage when extensive discovery may unearth facts that could undermine the claimant’s case.
A novel or creative theory of liability may also be viewed more favorably in arbitration. When proceeding in federal court, such theories, and the expert reports upon which they are based, must overcome the scrutiny of a Daubert motion before trial. Daubert motions are generally looked upon with disfavor in arbitration, assuming one is permitted at all. What this ensures is that the petitioner’s expert will testify at the hearing. The fact that the case gets to that stage, as opposed to being disposed on a motion to strike, typically increases its settlement value.
The same considerations arise with respect to damages, especially claims for lost profits or damage to goodwill. New York courts scrutinize such claims carefully, denying them unless it can be demonstrated with reasonable certainty that: a) the loss is attributable to the breach; b) the amount of loss can be proven; and c) such damages were fairly within the contemplation of the parties when the contract was made. Failure to present such proof with the requisite certainty will mean the dismissal of the damage claim as remote, contingent or speculative. In contrast, an arbitrator may view the damage evidence more leniently, if finding otherwise will leave a clear wrong without a remedy. The deference with which courts view arbitration awards will make it very difficult to set a lost profit recovery aside, especially if it is not a reasoned award.
Finally, although arbitration does not forestall a long appellate process, it certainly makes defending a favorable award easier and less expensive, given the limited bases on which it can be attached.
The foregoing is necessarily based on generalities. Every arbitrator approaches issues such as these differently. Moreover, every case is unique. For example, when the subject matter of the dispute is esoteric or involves sophisticated and complex issues that are industry specific, not your ordinary commercial case, the ability to select a panel of arbitrators that is experienced in that area, can be a strategic advantage; or it may actually be a disadvantage, depending on the facts of the case.
Joe DiBenedetto recently retired from Winston & Strawn LLP, after spending 46 years in its Manhattan office as a capital partner specializing in commercial litigation. He formed JDB Mediation LLC to further develop his mediation and arbitration practice, which is centered in Manhattan and its surrounding counties (including Westchester, Nassau and Suffolk). Joe DiBenedetto’s experience, training, and other credentials are more fully described at www.JDBMediation.com .