Ensuring a Cost-Efficient Arbitration

The cost of arbitration is one advantage it has over litigation, but with the encroachment of the U.S. litigation process into the arbitration process that’s becoming less of an advantage. Parties often spend significant time and resources fighting over issues that could have been addressed easily when they wrote the arbitration clause of their contract. The authors identify some pitfalls of arbitration clauses and how to address them.

Most arbitration clauses are drafted to apply to any dispute “arising from or in connection with” the contract. This can result in one side dragging in unintended parties or making numerous claims in the hope that one will stick. Parties who wish to limit arbitration to contractual disputes should consider more restrictive language – for example, a clause covering disputes “arising out of” the contract but not “in connection with” the contract.

A perceived advantage of non-administered arbitration is that parties do not pay administrative fees. However, more often than not the institution’s administrative fees are negligible compared to attorney and arbitrator fees. The potential cost savings from lower arbitrator rates generally outweighs the savings from nonpayment of administrative expenses.

Depositions are costly, and they take management time, but they can be avoided easily by a stipulation in the arbitration clause. This should be married with a requirement that direct testimony be presented beforehand, in writing, so the arbitrators can review and opposing counsel can prepare for cross-examination.