Arbitration Schizophrenia - Managing And Meeting Client Expectations

Wednesday, September 1, 2004 - 01:00

As corporate counsel, you have clients - they are the company officers and business group leaders who retain you every day to handle matters that affect their groups and the corporation generally in significant ways. To handle clients successfully, you need to manage their expectations. To do this, it is critical to find out what they want and what they think you can achieve for them. Then, if you perceive that what they think you can achieve for them varies from what you think you can achieve, you need to give them a reality check. Like any good project manager, you need to continually update them as your assignment progresses, constantly linking what you told them to expect with what actually is happening. That is the way successful private lawyers and managers of projects for customers generally handle their clients. It avoids surprises. It fosters rational decisions. It creates results that are closer to budget than they would be if client expectations are unrealistic or disappointed because of bad predictions. And businessmen like budgets - particularly if they are met.

Arbitration is no different, except that typically the lawyer who initially drafts the arbitral agreement for a commercial matter is not the one who later has to litigate it. Most corporations these days probably require arbitration as a matter of policy, so if you are the drafting lawyer, you rarely go through the exercise of explaining what arbitration is, as opposed to litigation, because that is no longer an issue. But what kind of arbitration does your client, and for that matter, you, expect? Do you intend that the arbitration that you are creating - yes, creating - is to reach a result that is at least roughly equivalent - albeit, you hope, quicker and cheaper - to the result you would get in a well-tried and appealed court proceeding? Or is it your intent that the arbitrators have the full ability to disregard the expensive document you have created and impose a settlement on the parties that accords only with their private notion of fairness and equity? Do you know - really know - that there are two totally different kinds of arbitrations and that how you draft the arbitration clause - and this assumes that you are not simply mindlessly pulling a form out of a drawer or using an old agreement - makes all the difference in the world?

First, what does your client want? All the recent surveys show that businessmen clients don't care as much about speed, cost, no discovery, no juries, etc. than they care about - guess what? - JUSTICE. Yes, justice. The very thing that a recent study of laboratory animals given disparate treatment shows that all vertebrates care about - the perception that someone is treating them the way that other vertebrates in similar circumstances are treated. This is fundamental to social order and, it seems, is actually somewhere lodged in our DNA. Businessmen understand that the lack of public funding to resolve private disputes between private individuals is drying up markedly, so they realize that private justice is frequently required. But that doesn't mean that they don't care if the ultimate result is just and fair. In fact, they do. So if your client has that expectation - and the overwhelming majority do - you'd better draft that clause to be sure that he or she gets a private justice arrangement in which that is guaranteed as much as you can guarantee it.

How do you do that? Let's go back to the two kinds of arbitration. In Europe, the distinction is clear and is understood by most everyone. In Europe there is a kind of arbitration in which the result is determined by the arbitrators pursuant to the evidence presented, the parties' agreement and the governing law. You can be sure that this is the kind of arbitration that is assumed and expected when, for example, a giant oil company is litigating in Geneva with a foreign government over oil concession rights, or any other kind of important commercial dispute. Eminent, respected arbitrators in this kind of arbitration will throw fits if they detect their co-arbitrators considering deciding a complicated issue by quotient, or by "splitting the baby" (Fr., "couper la poire in deux"), flipping a coin or any other method which is not based on a considered judgment of the law as applied to the credible evidence.

But there is a second kind of arbitration: arbitration ex aequo et bono (roughly, in equity and good conscience) where the arbitrator (sometimes called an "amiable compositeur") listens to anything the parties want to tell him, reads the documents, considers the law, but then IMPOSES a settlement he deems fair. He doesn't mediate, he doesn't cajole, he doesn't try to get the parties to agree (not necessarily anyway) - he just imposes a settlement. He can disregard the law, disregard the parties' documents, and do whatever he wants.

You may be shocked by this, but here goes: The law of American arbitration is based on the latter model. Let me say it again. The law of American arbitration is based on the latter model. So if your client is expecting justice and fairness as a court might mete out, you are not setting expectations properly if you don't tell him this. Or better, if he tells you that he wants a result similar to that a properly tried and appealed court case might create, then you had better draft your arbitration clause as it has never been drafted before. You need to specify that you want your case tried according to the facts and the law and that an ex aequo et bono result is not intended. You also must ask the arbitrators to take an oath that they'll in fact do that (remember, you probably can't successfully appeal if they don't follow the law the way you think it is). You should write in a mandatory ethics provision (arbitrators frequently like that because it makes their job easier, assuming you pick a good code). And you'd better think hard about how your arbitrators will be selected in the first place and what safeguards you are going to write in to guarantee that you get a reasoned result supported by the facts and the law.

To illustrate:

Read the 1855 (yes, 1855) U.S. Supreme Court case of Burchell v. Marsh, 58 US 344. Tell your businessman client that in this case the court affirmed a decision of arbitrators denying an admitted $4 million (in today's money) claim of a plaintiff against two debtors simply because the plaintiff's lawyer engaged in abusive collection tactics, and awarded an affirmative recovery to the defendants without any proof that the abusive tactics resulted in one penny of provable damage. Ask him if this is the kind of arbitral justice he wants, or does he want something closer to the facts and the law?

Tell him that there's a case where two parties sued each other over a busted sale of assets. During court-required mediation, they agreed to arbitrate before a panel of three accountants, designating the mediator as a judge to decide any legal questions. The arbitrators decided that the transaction was totally ill-conceived, threw out the deal documents prepared by lawyers and agreed on a fair settlement. They asked the mediator whether they could so disregard the law and the parties' documents. The answer: "Technically no, but arbitrators do it all the time."

I won't belabor the point by giving additional examples and citing to the chorus of criticism of arbitration's lack of consistent results. I simply want to point out that there is a reason for those criticisms: drafting counsel do not understand the source of the law and rarely themselves litigate the clauses they draft. As a result, their documents too often fail to deal with the most important issue: what are the client's expectations and how do you meet them?

James D. Wing is a partner in the Miami office of Holland & Knight LLP. He can be contacted at (888) 688-8500.

Please email the author at james.wing@hklaw.com with questions about this article.