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Arbitration: Rethinking the Pitfalls
Much has been written about the use of alternative dispute resolution (ADR) to address equipment leasing disputes, some of it positive and much of it negative. For a variety of reasons, the equipment lessor legal community has historically been reluctant to embrace alternative methods of avoiding protracted litigation.
But as providers of ADR services have expanded their offerings, and as professional neutrals have become more sophisticated in matters involving corporate finance and leasing, both arbitration and mediation have in many cases been shown to be increasingly efficient, productive, and cost effective alternatives for resolving and disposing of unwelcome business disputes.
This article focuses on the use of commercial arbitration to address and resolve disputes in equipment leasing, bringing readers (particularly lessor counsel) up to date on relatively recent developments, rethinking the often-cited pitfalls, and recounting the benefits of using this well tested out-of-court method to avoid the ordeals of litigation.
Traditional Concerns of Counsel
A number of objections have customarily been raised by lessor counsel in connection with resolving commercial disputes through arbitration. While some of these concerns continue to be encountered in specific cases, many of them have become significantly less troublesome as the qualifications of individual arbitrators and the process of arbitration itself have evolved and become more manageable and more sophisticated over time. The most often-heard objections, and the most recent advances in arbitration in those areas, are discussed in this article.
Selection of Arbitrators
The first issue facing counsel who choose to arbitrate claims rather than litigate them (or who are faced with mandatory arbitration clauses in their contracts) is the selection of one or more arbitrators to hear their cases. (Note that commercial arbitrations are most often conducted either by one arbitrator or by three arbitrators acting as a panel, with the choice between the two formats typically being determined either by reference to the arbitration clause itself or to the amount in controversy in the case, with arbitration providers' rules often requiring three-arbitrator tribunals for amounts in dispute of $1 million or more).
If a contractual arbitration clause requires the proceedings to be conducted in accordance with rules promulgated by a specific provider (e.g., American Arbitration Association, JAMS, or CPR), the provider's rules typically include procedures for the selection by the parties and/or counsel of the arbitrator(s) who will hear the case. Very often, this process involves the use of a so-called strike list, in which a list of names of potential arbitrators is provided to the parties, who then “strike” from the list any candidates they elect not to use. In most cases, this choice is entirely discretionary, and if necessary, the provider will supply additional names or lists of names if the parties cannot find any candidates in common. (Sometimes this process may go several rounds, but all three of the primary arbitration providers include hundreds of commercial arbitrators on their rosters.)
Historically, lessor counsel have expressed concern about the seeming arbitrariness of this process and about their inability to control the selection process itself under the providers' rules. There certainly have been instances of dissatisfaction by counsel with the proposed arbitrators (and this is an area in which disagreements may no doubt arise early in the case); but in reality counsel are much more in control of who will hear their case than they are in the random selection of a trial judge. As the major arbitration providers have grown in both size and sophistication, and as their rosters have come to include more subject matter specialists, the choices available to counsel have become more refined and more tailored to commercial matters generally and, in many cases, to leasing and financing specifically. In today's arbitration context, counsel are nearly always entitled to review detailed r'sum's and background information during the selection process.
Experienced arbitrators with knowledge of commercial matters and of corporate financing terminology and practices can very often be found and selected to hear leasing disputes; and the engagement of such arbitrators may result in much more timely and cost effective discovery, motion practice, evidentiary hearings, and awards preparation. Counsel are well advised to inform the arbitration providers of their specific subject matter requirements even before any prospective arbitrators are added to the strike list, to be certain that the arbitrator(s) who ultimately hear the case are equipped to hear and understand relevant evidence and argument without the need for “training” as they go.
Dispositive Motions
In the past, commercial arbitrators were often prohibited under the rules of the major arbitration providers from hearing dispositive motions and from rendering awards of summary disposition in commercial arbitration. These prohibitions grew from the historical view of arbitration more as a form of equitable problem solving than as a private judicial proceeding with awards based entirely on the prevailing facts and law of the case. Counsel representing parties in commercial arbitrations who felt that certain of their issues were ripe for the making of dispositive motions have sometimes been frustrated by their inability to do so under the applicable provider's rules.
More recently, however, all of the major commercial arbitration providers' rules have been revised to accommodate the filing and hearing of dispositive motions and the hearing and granting of summary adjudication of issues by the arbitrator(s). Most often, such motions may be heard upon a finding by the arbitrator that they are more likely than not to succeed and that they will help narrow the issues and streamline the arbitration proceeding itself.
Under these revised rules, in cases involving straightforward issues of law (especially when being heard by a knowledgeable and experienced commercial arbitrator), such motions may be utilized to trim a lessor's case down to the essential disputed facts and, when compared with litigation before a general jurisdiction judge in a public courtroom, to significantly reduce the time and cost required to prosecute such a case.
Although most of the applicable rules give arbitrators wide discretion in deciding whether or not to hear (and of course whether or not to grant) dispositive motions regarding specific issues in a case, this new uniformity of rules among the major arbitration service providers should be welcome news for lessor counsel, providing a means for summary prehearing disposition of gateway issues and purely legal questions.
Appeal of Awards
Perhaps the most frequently cited objection to arbitration among lessor counsel is the long-held belief that arbitration awards are final, permanent, and cannot be reviewed or appealed, even if the arbitrator commits significant error. Coupled with the concern that the selected arbitrator may not be qualified to hear and understand the more arcane or intricate factual or legal issues involved in an equipment leasing dispute, this belief often leads counsel to think they (and their clients) are better off simply to “play the courtroom lottery.” Then, the thinking goes, if the judge gets it wrong they can at least appeal the verdict and try to straighten things out with the appellate justices.
Historically, of course, this view has gained support from a number of well-publicized cases in which arbitrators have indeed misread the law or made rulings that clearly did not conform with established precedent. Yet, when challenged, they were nevertheless upheld as not meeting the “manifest disregard” standard established by many appellate courts for the vacatur of arbitration awards. Under this nonstatutory (but widely applied) standard, an award may be vacated only if: 1) the applicable legal principle is clearly defined and not subject to reasonable debate; and 2) the arbitrator refused to heed that legal principle. Such a standard for the vacatur of arbitration awards understandably gives many litigators, and many leasing lawyers, serious pause when considering the use of arbitration to hear and decide disputes of any significant size or scope.
Over the past several years, however, the primary providers of arbitration services in the U.S. and elsewhere have heard and heeded the call from practitioners to address this concern. Consequently, the rules of all the major arbitration providers have now been amended to include arbitration appeal procedures. In general, the parties may include in an arbitration clause the right to appeal an arbitration award based upon perceived error on the part of the original arbitrator(s), either in findings of facts upon which the award is based or in interpretations of applicable law. Appeals may generally be initiated by either party following certain specific procedures regarding the giving of notice, the timeliness of appeals, the payment of fees, and other administrative details. Arbitration appeals are typically heard by panels of arbitrators who serve in that specific capacity under the auspices of the respective providers, many of whom have extensive experience in appellate matters (and who are most likely retired judges or appellate judicial officers).
Counsel may submit briefs and argument just as they would in a first-level court of appeals in the applicable legal jurisdiction, although oral argument is not always allowed unless expressly requested by the appellate panel. In general, in accordance with the specific provider's rules, the appellate panel (most appeals utilize a three-arbitrator tribunal) may affirm, reverse, or modify the original arbitration award. Remand to the original arbitrator(s) is generally not allowed; but the appellate panel itself may hear new evidence if counsel believe clear error was committed by the original arbitrator(s) and may consider additional legal precedent and arguments if counsel challenge the original arbitrator(s)' legal findings or interpretations. The appellate panel may then render a “new” award based upon its findings.
These arbitration appeals rules and processes have greatly extended the flexibility and rationality of utilizing arbitration in the hearing and resolving of commercial disputes, and lessor counsel should surely be cognizant of the availability of such “private” rules-based appeals when considering whether or not to take advantage of the other benefits of arbitration. The arbitration appeals rules for the three major providers of ADR services in the U.S. are available online at the following addresses:
- AAA: http://bit.ly/1ZGlFMk
- CPR: http://bit.ly/1jr18Lq
- JAMS: http://bit.ly/1k7Xje0
Traditional Benefits of Arbitration
When coupled with the relatively recent developments described above, the traditional benefits of utilizing arbitration to hear and resolve commercial disputes become even more compelling. Arbitration has been shown to be more cost-effective than litigation, even when taking into account the cost of the arbitrator(s)' fees and other direct costs, largely due to the streamlined scheduling and responsiveness of the process. (Indeed, given the on-going budget constraints and consequent calendaring difficulties in many jurisdictions, getting a case to trial in court at all has become ever more time consuming, expensive, and frustrating.)
Arbitration is also much more “user friendly,” allowing for more cooperative and customized discovery and prehearing procedures, a more cordial and personalized attitude during hearings (for clients and counsel alike), and, in many cases, an environment more conducive to possible settlement and early resolution without the need for protracted warfare. (Although arbitration is of course quite different from mediation, the mindset of cooperation and cordiality often opens the door to settlement discussions, even during the course of an evidentiary hearing.)
Conclusion
Taken all together, the relatively recent improvements in arbitration processes and procedures, along with the long-recognized advantages of arbitration over litigation, should be carefully considered by lessor counsel when confronted with the need to resolve disputes through third-party means. Counsel may be pleasantly surprised to find that arbitration is not as objectionable as they once believed. Indeed, it may well be worth a try.
Much has been written about the use of alternative dispute resolution (ADR) to address equipment leasing disputes, some of it positive and much of it negative. For a variety of reasons, the equipment lessor legal community has historically been reluctant to embrace alternative methods of avoiding protracted litigation.
But as providers of ADR services have expanded their offerings, and as professional neutrals have become more sophisticated in matters involving corporate finance and leasing, both arbitration and mediation have in many cases been shown to be increasingly efficient, productive, and cost effective alternatives for resolving and disposing of unwelcome business disputes.
This article focuses on the use of commercial arbitration to address and resolve disputes in equipment leasing, bringing readers (particularly lessor counsel) up to date on relatively recent developments, rethinking the often-cited pitfalls, and recounting the benefits of using this well tested out-of-court method to avoid the ordeals of litigation.
Traditional Concerns of Counsel
A number of objections have customarily been raised by lessor counsel in connection with resolving commercial disputes through arbitration. While some of these concerns continue to be encountered in specific cases, many of them have become significantly less troublesome as the qualifications of individual arbitrators and the process of arbitration itself have evolved and become more manageable and more sophisticated over time. The most often-heard objections, and the most recent advances in arbitration in those areas, are discussed in this article.
Selection of Arbitrators
The first issue facing counsel who choose to arbitrate claims rather than litigate them (or who are faced with mandatory arbitration clauses in their contracts) is the selection of one or more arbitrators to hear their cases. (Note that commercial arbitrations are most often conducted either by one arbitrator or by three arbitrators acting as a panel, with the choice between the two formats typically being determined either by reference to the arbitration clause itself or to the amount in controversy in the case, with arbitration providers' rules often requiring three-arbitrator tribunals for amounts in dispute of $1 million or more).
If a contractual arbitration clause requires the proceedings to be conducted in accordance with rules promulgated by a specific provider (e.g., American Arbitration Association, JAMS, or CPR), the provider's rules typically include procedures for the selection by the parties and/or counsel of the arbitrator(s) who will hear the case. Very often, this process involves the use of a so-called strike list, in which a list of names of potential arbitrators is provided to the parties, who then “strike” from the list any candidates they elect not to use. In most cases, this choice is entirely discretionary, and if necessary, the provider will supply additional names or lists of names if the parties cannot find any candidates in common. (Sometimes this process may go several rounds, but all three of the primary arbitration providers include hundreds of commercial arbitrators on their rosters.)
Historically, lessor counsel have expressed concern about the seeming arbitrariness of this process and about their inability to control the selection process itself under the providers' rules. There certainly have been instances of dissatisfaction by counsel with the proposed arbitrators (and this is an area in which disagreements may no doubt arise early in the case); but in reality counsel are much more in control of who will hear their case than they are in the random selection of a trial judge. As the major arbitration providers have grown in both size and sophistication, and as their rosters have come to include more subject matter specialists, the choices available to counsel have become more refined and more tailored to commercial matters generally and, in many cases, to leasing and financing specifically. In today's arbitration context, counsel are nearly always entitled to review detailed r'sum's and background information during the selection process.
Experienced arbitrators with knowledge of commercial matters and of corporate financing terminology and practices can very often be found and selected to hear leasing disputes; and the engagement of such arbitrators may result in much more timely and cost effective discovery, motion practice, evidentiary hearings, and awards preparation. Counsel are well advised to inform the arbitration providers of their specific subject matter requirements even before any prospective arbitrators are added to the strike list, to be certain that the arbitrator(s) who ultimately hear the case are equipped to hear and understand relevant evidence and argument without the need for “training” as they go.
Dispositive Motions
In the past, commercial arbitrators were often prohibited under the rules of the major arbitration providers from hearing dispositive motions and from rendering awards of summary disposition in commercial arbitration. These prohibitions grew from the historical view of arbitration more as a form of equitable problem solving than as a private judicial proceeding with awards based entirely on the prevailing facts and law of the case. Counsel representing parties in commercial arbitrations who felt that certain of their issues were ripe for the making of dispositive motions have sometimes been frustrated by their inability to do so under the applicable provider's rules.
More recently, however, all of the major commercial arbitration providers' rules have been revised to accommodate the filing and hearing of dispositive motions and the hearing and granting of summary adjudication of issues by the arbitrator(s). Most often, such motions may be heard upon a finding by the arbitrator that they are more likely than not to succeed and that they will help narrow the issues and streamline the arbitration proceeding itself.
Under these revised rules, in cases involving straightforward issues of law (especially when being heard by a knowledgeable and experienced commercial arbitrator), such motions may be utilized to trim a lessor's case down to the essential disputed facts and, when compared with litigation before a general jurisdiction judge in a public courtroom, to significantly reduce the time and cost required to prosecute such a case.
Although most of the applicable rules give arbitrators wide discretion in deciding whether or not to hear (and of course whether or not to grant) dispositive motions regarding specific issues in a case, this new uniformity of rules among the major arbitration service providers should be welcome news for lessor counsel, providing a means for summary prehearing disposition of gateway issues and purely legal questions.
Appeal of Awards
Perhaps the most frequently cited objection to arbitration among lessor counsel is the long-held belief that arbitration awards are final, permanent, and cannot be reviewed or appealed, even if the arbitrator commits significant error. Coupled with the concern that the selected arbitrator may not be qualified to hear and understand the more arcane or intricate factual or legal issues involved in an equipment leasing dispute, this belief often leads counsel to think they (and their clients) are better off simply to “play the courtroom lottery.” Then, the thinking goes, if the judge gets it wrong they can at least appeal the verdict and try to straighten things out with the appellate justices.
Historically, of course, this view has gained support from a number of well-publicized cases in which arbitrators have indeed misread the law or made rulings that clearly did not conform with established precedent. Yet, when challenged, they were nevertheless upheld as not meeting the “manifest disregard” standard established by many appellate courts for the vacatur of arbitration awards. Under this nonstatutory (but widely applied) standard, an award may be vacated only if: 1) the applicable legal principle is clearly defined and not subject to reasonable debate; and 2) the arbitrator refused to heed that legal principle. Such a standard for the vacatur of arbitration awards understandably gives many litigators, and many leasing lawyers, serious pause when considering the use of arbitration to hear and decide disputes of any significant size or scope.
Over the past several years, however, the primary providers of arbitration services in the U.S. and elsewhere have heard and heeded the call from practitioners to address this concern. Consequently, the rules of all the major arbitration providers have now been amended to include arbitration appeal procedures. In general, the parties may include in an arbitration clause the right to appeal an arbitration award based upon perceived error on the part of the original arbitrator(s), either in findings of facts upon which the award is based or in interpretations of applicable law. Appeals may generally be initiated by either party following certain specific procedures regarding the giving of notice, the timeliness of appeals, the payment of fees, and other administrative details. Arbitration appeals are typically heard by panels of arbitrators who serve in that specific capacity under the auspices of the respective providers, many of whom have extensive experience in appellate matters (and who are most likely retired judges or appellate judicial officers).
Counsel may submit briefs and argument just as they would in a first-level court of appeals in the applicable legal jurisdiction, although oral argument is not always allowed unless expressly requested by the appellate panel. In general, in accordance with the specific provider's rules, the appellate panel (most appeals utilize a three-arbitrator tribunal) may affirm, reverse, or modify the original arbitration award. Remand to the original arbitrator(s) is generally not allowed; but the appellate panel itself may hear new evidence if counsel believe clear error was committed by the original arbitrator(s) and may consider additional legal precedent and arguments if counsel challenge the original arbitrator(s)' legal findings or interpretations. The appellate panel may then render a “new” award based upon its findings.
These arbitration appeals rules and processes have greatly extended the flexibility and rationality of utilizing arbitration in the hearing and resolving of commercial disputes, and lessor counsel should surely be cognizant of the availability of such “private” rules-based appeals when considering whether or not to take advantage of the other benefits of arbitration. The arbitration appeals rules for the three major providers of ADR services in the U.S. are available online at the following addresses:
- AAA: http://bit.ly/1ZGlFMk
- CPR: http://bit.ly/1jr18Lq
- JAMS: http://bit.ly/1k7Xje0
Traditional Benefits of Arbitration
When coupled with the relatively recent developments described above, the traditional benefits of utilizing arbitration to hear and resolve commercial disputes become even more compelling. Arbitration has been shown to be more cost-effective than litigation, even when taking into account the cost of the arbitrator(s)' fees and other direct costs, largely due to the streamlined scheduling and responsiveness of the process. (Indeed, given the on-going budget constraints and consequent calendaring difficulties in many jurisdictions, getting a case to trial in court at all has become ever more time consuming, expensive, and frustrating.)
Arbitration is also much more “user friendly,” allowing for more cooperative and customized discovery and prehearing procedures, a more cordial and personalized attitude during hearings (for clients and counsel alike), and, in many cases, an environment more conducive to possible settlement and early resolution without the need for protracted warfare. (Although arbitration is of course quite different from mediation, the mindset of cooperation and cordiality often opens the door to settlement discussions, even during the course of an evidentiary hearing.)
Conclusion
Taken all together, the relatively recent improvements in arbitration processes and procedures, along with the long-recognized advantages of arbitration over litigation, should be carefully considered by lessor counsel when confronted with the need to resolve disputes through third-party means. Counsel may be pleasantly surprised to find that arbitration is not as objectionable as they once believed. Indeed, it may well be worth a try.
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