Arbitration in the Corporate Context

Wednesday, January 1st, 2003 at 12:00 am by Julie K. Bracker and Larry D. Soderquist
Julie K. Bracker and Larry D. Soderquist, Arbitration in the Corporate Context, 2003 Colum. Bus. L. Rev. 1

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.

Further complicating arbitration is a series of Supreme Court rulings that interpret the Federal Arbitration Act (‘FAA‘ or ‘Act‘) to be a substantive body of law, carrying presumptions that apply to all arbitration clauses and pre-empting state laws. As Part II will demonstrate, these decisions are far from intuitive, and must be studied carefully to avoid the disasters that await the uninitiated.

With such conflicting and complicated considerations, inclusion of an arbitration clause in a contract is a difficult decision. It is nevertheless a critically important one, as often litigation and arbitration will yield dramatically different results. Furthermore, because arbitration is a matter of contract between the parties, a careful drafter must be aware not only of whether to include an arbitration provision, but also what should be included. Arbitration leaves such matters as the scope of issues, remedies, location, timing, choice of law and choice of arbitrator open to the discretion of the parties. As many litigants have found to their dismay, poor drafting of an arbitration provision can give away the game before a dispute ever arises.

It is difficult to understand the courts’ current stance on arbitration without first understanding the schizophrenic history of arbitration in the United States, particularly focusing on the federal common law that is being created by the Supreme Court’s interpretation of the FAA. An understanding of this history, discussed in Part II, is vital to understanding more recent Supreme Court jurisprudence, which is presently reshaping the face of arbitration. Part III examines judicial review of arbitration awards, underscoring the need to get it right the first time. Part IV spotlights three recent Supreme Court cases. Part V then predicts the outcome of two circuit court splits. Examination of these issues should enable a corporate decision-maker to come to an informed decision about arbitration.

Author Information

Julie Bracker practices with Rogers & Hardin LLP in Atlanta. Larry Soderquist is a Professor of Law and Director of the Corporate and Securities Law Institute at Vanderbilt Law School