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Businesses Are Losing Faith in the Fairness of Arbitration – But What Comes Next?

When two parties enter into a business partnership, there is already a certain level of trust between them. It’s human nature to presume that there will not be future problems, or if there are, that they can be handled amicably. As such, many investors leave the terms for settling disputes far too open and ripe for exploitation.

Nowadays, the boilerplate contract language calling for the settlement of disputes via arbitration is increasingly coming under scrutiny, as tales of corruption, manipulation, and rigging of the arbitral process leading to disastrously unfair outcomes has undermined trust in such panels, with many companies strongly preferring traditional legal venues.

 Dating back to the late 18th century, arbitration was first established as an alternative dispute resolution process for the exact same reason it is used today – to be cost efficient, private, and most importantly, fast. But this presumes perfect conditions and proper good faith conduct by the parties, and it turns out, when unscrupulous businesses seek to manipulate the arbitral process, there is very little recourse or consequences.

This is a major problem, and businesses need to be made aware of the risks, while governing bodies such as the American Arbitration Association are in deep need of reform.

Arbitration processes are not subject to appeal as there is no formal appeals process for arbitration awards; an arbitration decision is final, whether a party feels the arbitrators or process was biased against them. Appeals which can, in some cases, go up to the U.S. Courts of Appeals and, in federal law-related cases, to the Supreme Court, each consisting of 3 Judges and 9 Justices respectively. This statutory multiplicity of adjudicators in a court system makes biased decisions less likely.

The identity of the arbitrator(s) in an arbitration panel is a significant factor in determining the outcome of an arbitration process. Arbitrators are often selected by the parties to the dispute—leading to the possibility of arbitrator bias in favor of the party who selected them. This detracts from the advantage one might argue that three arbitrators hold over a sole arbitrator whose bias cannot be checked.

 Although the arbitration process offers the option of selecting three arbitrators, there is a risk of anchoring or over-reliance on the opinion of one arbitrator by other arbitrators in an arbitration panel. This anchoring effect may make arbitrators more relaxed on their roles and be less independent, adopting the position of the dominant arbitrator

Arbitration awards, much like court rulings and judgments, are final decisions of the arbiters under the doctrine of functus officio which limits alterations on an arbitral award. However, arbitral awards can require reviews where a court deems it necessary to revise the basis of the award to determine whether it is ‘reasoned’ (has a detailed rationale or justification for the arbitral decision or award).

This right to judicial review, emphasized by the court’s decision in the 2003 and 2018 cases: Brown v. Witco Corp and Smarter Tools exposes the possibility of ambiguity in arbitral awards for which parties can seek recourse to the court to mandate the arbitrator to correct. There is literally no guidance on what a “reasonable” award should look like. These cases also show that arbitration panels can sometimes omit to adjudicate a material issue in a case before them or overlook specifying the scope and implementation of the arbitral award – or even much worse conduct that would be flagrantly illegal in a normal courtroom.

There are cases in which the independence of arbitration judges has come under fire. There was the recent media coverage of arbitration lawyer. Marc J. Goldstein, whom a whistleblower accuses of allegedly taking a $250,000 bribe from Goldman Sachs, presumably in exchange for rigging an award against one of their opponents. Another firm, National Oilwell Varco, was able to have an arbitration award overturned after discovering cases of bribery, according to media reports.

 Considering that arbitration awards can have far-reaching impacts on labor, family, or business disputes, it is expected that the arbitration process would hold more promise of transparency, fairness, and due process. However, the Rules of Evidence which are foundational to establishing the facts of the case, determining culpability, and awarding damages under litigation case are lacking in arbitration. This can have an adverse effect on the results of the arbitration process since hearsay evidence can have free rein.

The very nature of arbitration renders parties stuck with the decisions of the arbitration panel and affords aggrieved parties no recourse to appeal. This obviously reduces the cost of continued engagement with the process, which is typical in litigation. On the other hand, it increases the possibilities of overreaching by the arbiter, and lack of diligent prosecution by the lawyer(s) representing a party.

As Section 10 of the Federal Arbitration Act prescribes in summary: any party to the arbitration may make an application for a court to vacate an arbitral award based on the arbiter’s fraud, evidence of the partiality of an arbitrator(s), arbitrators found guilty of misconduct, and arbitrators found overreaching their powers.  But too often, this is too little, too late.

With businesses losing faith in arbitration, there is a need for other alternatives to come forward in which there can be a higher level of trust in the fairness of the proceedings while maintaining the privacy, speed, and low costs that most commercial interests prefer.

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