The Increasing Appeal of Private Arbitration and a Brief Look at Some of the Downside

           Choosing to opt out of traditional court controlled litigation in favor of private arbitration, although anything but new, appears to be an increasingly attractive choice to disputing parties and their attorneys.  And for good reason.  The clogging of our court dockets and the overburdening of the judicial system as a consequence of the public’s ever increasing appetite for utilizing the courts as the venue for solving all of the evils of society, both large and small, has been the topic of significant public attention both within and outside of the legal community.  The negative impact of that phenomenon on the judicial process has been both manifest and predictable, including as it does the significant delay and high costs associated with so much of the litigation experience.  As committed and responsive as the New Jersey court system has been in its efforts to accommodate “all comers”, the challenges continue to be steep not the least of which is the inevitable delay generated by crowded dockets.  Not surprisingly, therefore, abandoning court controlled litigation in favor of private arbitration has not only become more appealing, it has also taken hold in an increasingly wide range of disputes. 

            This phenomenon has been particularly evident in the area of commercial litigation where, at least since the early 1990’s, arbitration has become more and more popular with parties involved in business disputes. [2]  However, that appeal now extends well beyond the commercial world and has noticeably expanded into other areas of disputes including malpractice claims, both legal and medical, as well as personal injury claims. It is also the standard in construction disputes based on the long-standing practice to stipulate to arbitration as a component of the agreements typically utilized in that field. This choice, however, admittedly carries with it certain costs and although not necessarily economical, they certainly exists in other ways, all of which needs to be recognized.  First, however, a look at some of the benefits which have made voluntary arbitration such a good choice in the first place.

            The benefits that have prompted the expansion of private arbitration are numerous but the primary reasons are because it is almost always a faster and more economical alternative than bringing an action in court. The dynamics that drive those savings are multiple but they certainly include the lower costs associated with more restrictive discovery, the reduction in the number of pre-trial motions, the easier presentation of proofs as a consequence of the routine relaxation of the rules of evidence and the significant limitations on appeals.  More on that last component later.  As for the savings in discovery costs, discovery is almost always more streamlined in arbitration with fewer of the most cost generating devices such as multiple depositions.  Another common economy is the utilization of written expert reports in lieu of live testimony.  Speed is also a plus because arbitration proceedings are typically concluded much more expeditiously than court controlled litigation, especially compared to jury trials although there certainly can be exceptions to that.  However, one of the most attractive components of private voluntary arbitration is the ability of the attorneys and their clients to have greater control over the process.  Not only do the attorneys jointly dictate the selection of the arbitrator, they can also agree on what type of experience and expertise that the arbitrator should have.[3]  Conversely, in court controlled litigation not only do the parties have little or no influence over which judge hears the case, they also have no way of knowing whether the judge assigned will have any particularized experience with the subject matter that forms the basis of the dispute.  Jury trials, of course, include even less control. Confidentiality is another major plus in arbitration since, unlike in the court system where the process is obviously public, the details and the results of arbitration can be kept private so long as the parties stipulate to that.  That protection can be particularly important to defendants involved in legal and medical malpractice cases. 

            Although the above examples are by no means exhaustive, they do reference many of the more obvious pluses of private arbitration for practitioners and their clients.  That said, there is no question that arbitration has its downside and clearly it is not the right choice for every type of case.  For example, certain types of disputes simply do not lend themselves to the more streamlined discovery that is characteristic of arbitration.  So-called complex litigation is an example.  Much of the personal injury litigation field is another, including as it does the ability for claimants to appeal to the sympathies of a jury whether perceived or real.  Cases involving intricate legal issues are another example.  Violations of constitutional rights come to mind.  Nor are these examples by any means exhaustive.

            However, even in those cases that are traditionally a good fit for private arbitration there still needs to be a recognition of what one is giving up when making that choice.  For example, although the economic savings in arbitration are numerous, there are nevertheless some costs involved that one does not face when litigating in the courts.  Paying the costs of an arbitrator, or in some cases a panel of arbitrators, is one example.  That is obviously not required when going to court where the only charges are filing fees.[4]  Counsel fees, of course, will be incurred by the parties regardless of whether they engage in courtroom litigation or arbitration.  That said, arbitration proponents will quickly point out that attorney’s fees are likely to be less in arbitration because of the more streamlined process plus, those extra costs that are peculiar to arbitration are more than made up by other savings.  Another disadvantage is the flipside of the savings attributed to the limited discovery; that is, some cases simply require more discovery than is typically available in an arbitration.  On the other hand, there is no reason why counsel who choose arbitration cannot agree among themselves as to how much discovery they want and then make that part of their arbitration agreement.  If so, the arbitrator will be bound by that stipulation.  Another downside that must be considered is the limited grounds for an appeal. Proponents will argue that those limitations are actually an advantage because not only do they preclude the additional costs associated with that process but they also eliminate the delay that is a routine consequence of an appeal. Nevertheless, those who choose to arbitrate their disputes still need to at least be aware that these limitations exist and what they actually mean. 

            For example, the grounds for appealing an arbitration award in New Jersey are quite narrow and are strictly controlled by the provisions of the Arbitration Act.[5] In evaluating those limitations it is also necessary that one recognize that arbitration awards are not self-executing.  In other words, in those cases where the losing side does not voluntarily comply with the terms of the award, whether those terms include money damages, injunctive relief or both, unlike the courts, an arbitrator does not have the power to compel compliance.  Recognizing that reality and knowing that there will be instances where a successful litigant will require the backing of the State to achieve full relief, the drafters of New Jersey’s Arbitration Act have provided a method by which a party can seek confirmation and also acquire a means of enforcement.  Typically, that is achieved by the filing of a verified complaint and an order to show cause in the Superior Court.[6] Conversely, a losing party can follow the same route when seeking to overturn an award, or in the language of Act, “vacating or modifying” it.[7]  Applications to vacate an award must be filed within 120 days after the aggrieved party receives notice of the arbitrator’s decision.[8] Although, given the deference with which arbitration awards are treated by the courts they are more likely to be confirmed than vacated, the statute does give the court the power to either vacate, modify or correct an award.[9]

            As already noted, however, the Act narrowly defines the circumstances under which an award can be successfully vacated.[10] Those grounds include but are not limited to evident partiality or corruption by the arbitrator, misconduct by the arbitrator such as refusing to postpone a hearing or to hear admissible evidence or instances where the arbitrator exceeded or so imperfectly executed his or her powers that a mutual, final and definite award was not made.[11] For present purposes, however, I will concentrate on only one of those grounds since, in my experience, that is the part of the statute that attracts the most attention; that is, the claim that the award was procured by “fraud, corruption or undue means.”[12] Within that group, however, appeals based on “fraud and corruption” are fairly rare.  The “undue means” ground, on the other hand, has historically been a “hot button” item.  What is most significant about that, at least for present purposes, is that the challenges routinely sought to be squeezed into that term are “mistakes of law.”  What is even more interesting about that is that mistakes of law are not even mentioned in the statute as a ground for vacating an award.  Incidentally, nor is the insufficiency of the evidence although in order to provide some context to the review provisions it has long been held that arbitrators are not free to make awards that are “wholly bereft of evidential support.”[13]

            Returning now to “errors of law,” despite the absence of any reference to that as a ground in the Act, our courts have historically been more attentive, although not always more precise, when it comes to what that actually means in terms of the scope of judicial review.[14]  For example, in one of the earlier Supreme Court cases reviewing a challenge to an award based on a claimed legal error the Court concluded that because the arbitrator had mistakenly found that there was insurance coverage, the award was deemed to have “exceeded the powers” of the arbitrator and as a consequence, it was said to have been procured by “undue means.” See In re: Arbitration between Grover and Universal Underwriters Insurance Co., 80 N.J. 221 (1979) citing Held v. Comfort Bus Line, Inc., 136 N.J.L. 640 (Sup. Ct. 1948) where the “undue means” language in the statute was first interpreted to embrace a mistake of law.  As challenges evolved over the years, however and future courts were confronted with more of these types of claims it was subsequently determined that the scope of review relating to claimed legal errors should be more limited.  For example, it was later determined that the arbitrator’s alleged errors regarding a legal issue would nevertheless be sustained so long as they were “reasonably debatable.”[15]

            Thus, as our Supreme Court explained in Pernini Corp. v. Greate Bay Hotel & Casino Inc., even in those instances where a court would have made a different ruling of law, it should nevertheless defer to the arbitrator and confirm the award so long as the arbitrator’s legal conclusions were “reasonably debatable.”[16] For present purposes, one need not get into the details of the Perini case other than to note that it arose from a construction contract dispute. What is important is that although the plurality of the Court was troubled by the magnitude of the arbitration award, they were nevertheless satisfied that the arbitrators had not manifestly disregarded any undebatable principle of law.[17] In doing so, the plurality concluded that the “undue means” and “exceeding their powers” provisions of the statute were intended to embrace only “egregious mistakes of law.”[18] Remarkably, the Supreme Court revisited this issue only two years later and took an even more conservative position by adopting the test previously urged by the Chief Justice in his concurring opinion in Perini.[19] In doing so, it departed significantly from the “mistake of law” ground and held that arbitration awards were to be vacated only for “fraud, corruption or similar wrongdoing on the part of the arbitrators.”[20]

            Without delving further into an analysis of how the “fraud, corruption and similar wrongdoing” test played out in subsequent cases versus the “reasonably debatable” standard, it is sufficient for present purposes to simply point out that for those who choose to arbitrate as an alternative to court supervised litigation, one of the obvious trade-offs is that in those instances where an arbitrator does make an error of law, the likelihood of overturning the award on that basis is pretty low if not non-existent.[21]  In other words, however one defines that standard of review, whether it be the “reasonably debatable” type or “fraud, corruption or similar wrongdoing,” a challenge to the award on the basis of a legal mistake is not likely to be successful. Acknowledging that, however, the proponents of arbitration nevertheless see that limitation primarily as a “plus” not a minus because it tends to eliminate one of the more frequent and most expensive aspects of traditional litigation, that is, the extensive appeal process. That said, those who embrace that view still have to at least recognize that in choosing arbitration, despite the significant cost savings and the elimination of many of the risks attendant to jury trials, it is a choice that carries with it the risk that, as a practical matter, legal errors by an arbitrator are not likely to be correctable.    

            On the other hand, it is anything but clear how big a risk that is.  Although it is true that many private arbitrations are, by choice, conducted by specialists in their field who are not lawyers and thus run a higher risk of a legal error, my sense is that those types of cases (construction disputes, for example) are not usually driven by legal disputes.  Of course, there will be exceptions.  Also, in those cases where the legal issues are likely to be a large component of the dispute, such as legal malpractice cases, the significant odds are that the parties will choose an arbitrator who is well versed in that law, such as a retired Superior Court judge.  When that happens, the risks of clear mistakes of law are not likely to be high.  However one evaluates the importance of that risk, there are also ways to eliminate it and still choose arbitration.  For example, practitioners can simply stipulate in their arbitration agreement that New Jersey law is to apply and that the scope of judicial review will include legal errors. They may also avail themselves of the procedures set forth in the New Jersey Alternative Procedure for Dispute Resolution Act.[22]  In making those choices, however, the parties have to also recognize the additional costs they are risking, inviting as they will the greater likelihood of an appellate process. Whatever they decide, the fact is that in choosing arbitration they will now have control of the process in ways simply not available in traditional court supervised litigation, thereby making the advantages compelling in a large percentage of cases.

            In sum, voluntary private arbitration carries with it some clear advantages when compared to the more traditional court litigation and those advantages are likely to continue to motivate the expansion of its appeal.  Nevertheless, it is also true that arbitration is not a good fit in a large percentage of cases and thus there is little likelihood that our currently sitting judges will find themselves with time on their hands anytime soon.  Nor does arbitration come without some disadvantages, mainly for some of the same reasons that make it popular, that is, the somewhat truncated nature of the process and the limited grounds for appeal.  Thus, in the world of litigation, just as in life, one size does not fit all.  On balance, however, electing private arbitration is likely to have increasing appeal to disputing parties and their counsel in an expanding variety of settings.

Judge Gibson served 23 years on the bench in the Law and Chancery Divisions in New Jersey. He was also selected by the New Jersey Supreme Court to serve as one of only three judges in the State assigned to handle exclusionary zoning cases, that is, the so-called Fair Housing lawsuits.  Judge Gibson retired from the bench in August 2000 and currently practices law as an arbitrator, mediator, and discovery master. He has been engaged in hundreds of matters over the last decade, including a number of high profile cases. The Rutgers Journal of Law & Public Policy would like to thank Judge Gibson for submitting to the Region in Review Blog and we are honored to publish this blog.
[2]See generally John H. Henn, Where should you litigate your business dispute? AMERICAN ARBITRATION ASSOCIATES HANDBOOK ON ARBITRATION PRACTICES (2010).
[3] This is not always true in those cases managed under the auspices of the American Arbitration Association. For example, when the parties have not specified the method by which an arbitrator should be chosen, the AAA rules provide that each party select from a list provided by the AAA which of those arbitrators are deemed acceptable.
[4] Cases handled by the American Arbitration Association are, once again, the exception since there are various fees relating to that process.
[5] N.J. STAT. ANN. § 2A:23B-1 (2003).
[6]Id. § 2A:23B-5, 22.
[7]See generally id. § 2A:23B-20, 23.
[8]Id. § 2A: 23B-23(b).
[9]Id. § 2A:23B-22, 23, 24.
[10]Id. § 2A:23B-23.
[11]See generally N.J. STAT. ANN. §2A:23B-23, 24 for a more complete list of these provisions.
[12]  The Act also provides that a Court can modify or correct an award in instances where there is an evident miscalculation of figures or where the award covered matters not submitted by the parties, or where the award is imperfect “in a manner of form not affecting the merits of the controversy.” See N.J. STAT. ANN. § 2A:23B-24 (2003). 

[13] McHue Inc. v. Soldo Constr. Co., 238 N.J. Super 141, 147-48 (App. Div. 1990).

 [14] See IIan E. Simon, Tretina Printing, Inc. v. Fitzpatrick & Associates, Inc.: The Eradication of the Mistake of Law Doctrine in Private Sector Arbitration, 48 RUTGERS L. REV. 533 (1996), for a more complete analysis of this history.
[15] Perini Corp. v. Greate Bay Hotel & Casino, Inc., 129 N.J. 489, 492-93 (1991). Some more of the history is recited in this case as it is one of the landmark rulings in this field.
[16]Id. [17]Id. at 517.
[18]Id. at 494-95.
[19]Id. at 518 (Wilentz, C.J., concurring).
[20] Tretina Printing, Inc. v. Fitzpatrick & Assoc., Inc., 135 N.J. 349, 358 (1994).
[21]See Simon, supra note 14. See also Corp. City Prods. Co. v. Lauriero, 332 N.J. Super 499, 503-505 (App. Div. 2000), for a more recent example of how this type of challenge is treated.
[22] N.J. STAT. ANN. § 2A:23A-1 (2003).  !– /wp:html –>