The efficiency of commercial finance depends on carefully drafted agreements to ensure that money lent to a business is tied to repayment and to collateral obligations that are clear and enforceable through replevin, foreclosure and other remedies. The complex terms of modern equipment leases, commercial mortgages, and other asset-based lending structures, however, can create uncertainty that may lead to lengthy and expensive litigation. The National Center for State Courts has found that final disposition for even the most simple commercial finance dispute takes more than two years.
Compared to traditional litigation, surveys of attorneys have found arbitration to be less expensive and to lead to faster recovery. Commercial finance agreements, therefore, should contain arbitration clauses that protect rights and provide for specified equitable remedies. Selecting arbitration allows for the same remedies available in court in less time and at lower cost, thereby reducing the uncertainty of the transaction.
Arbitrators traditionally have had the power to grant equitable as well as legal relief. See Anderman/Smith Operating Co. v. Tennessee Gas Pipeline Co., 918 F.2d 1215, 1219 (5th Cir.1990). Historically, arbitration is a creature of contract and was used primarily to resolve contractual disputes. It has always been anticipated and expected that arbitrators had equitable powers because that was a common contractual remedy.
According to the Revised Uniform Arbitration Act (RUAA), the standard for the arbitrator is whether a provisional remedy is necessary "to protect the effectiveness of the arbitration proceeding and to promote the fair and expeditious resolution of the dispute." RUAA § 8 (a). This modern act reflects remedies available under the original Uniform Arbitration Act, which in turn reflected the powers that arbitrators have always had.
Any notion that an arbitrator does not have equitable powers is antithetical to the very nature of arbitration being a prompt, responsive, and exclusive forum, saving parties from the need and expense of litigation. In Klein Sleep Products, Inc. v. Hillside Bedding Co., the court stated that an "arbitrator has the power to grant injunctive relief" and that court involvement in granting an injunction may "undermine the arbitration process." 563 F. Supp. 904, 906-07 (S.D.N.Y. 1982). Obviously, a bifurcated process would be duplicative, time-consuming and expensive.
A key issue for drafters is to ensure the exclusivity of the arbitral procedure and the availability and use of injunctive remedies and any other type of equitable relief that may possibly be needed (i.e., declaratory relief, reformation). See e.g., Ever-Gotesco Resources v. Pricesmart, Inc., 192 F. Supp 2d 1040 (S.D.Cal. 2002)(clause stipulating "arbitration shall be the parties' exclusive remedy" mandated arbitration of provisional remedies request and court jurisdiction was "ousted" by the clause). The arbitration agreement should clearly empower the arbitrator to award injunctive and equitable relief, either through express language or by incorporation of appropriate rules of arbitration. See Wing v. Cingular Wireless, LLC, 2005 WL 1168363 (Cal.App. May 18, 2005).
Injunctive awards can be readily transferred through confirmation proceedings for enforcement and ongoing supervision as permanent injunctions. See e.g., See Swan Magnetics, Inc. v. Superior Ct., 66 Cal.Rptr.2d 541 (Cal.App. 1997).
Replevin, as a form of injunctive relief, is also readily available to be granted by an arbitrator. Arbitration is a unitary process like litigation, and there is no need to have a judge and arbitrators hear and review the same facts in two different proceedings in order to issue two different remedies.
In 2000, the National Conference of Commissioners of Uniform State Laws (NCCUSL) summarized the development of decisional law of arbitrator authority as including "the issuance of civil remedies of attachment, replevin, and sequestration to preserve assetsÉthat affect the subject matter of the arbitration proceeding." RUAA § 8 Comment 4.
Such interim remedies are essential to equipment leasing transactions. Equipment finance disputes are, for example, sometimes a result of the lessee's failure to pay, or to keep the equipment in proper condition or insured. A typical remedy available to lessors is the prompt recovery of the equipment in addition to the contractual deficiency, and this can be easily accomplished with the requisite arbitral order that is enforceable in any domestic and foreign jurisdiction(s) where the equipment is located.
Commercial Mortgage Foreclosure
Even in jurisdictions or agreements requiring "judicial foreclosure," parties can elect to have the substantive foreclosure matters conducted in arbitration by granting the arbitrator specific authority to render an award under the applicable state foreclosure law. An arbitrator can hear and decide the case and issue an order and, only if necessary, need the case go before a judge in a summary confirmation process. Through this prompt and inexpensive confirmation procedure, the necessary order to sell the property is issued. See North Central v. Siouxland Energy and Livestock Cooperative, 2004 WL 2413394 (D. Ia. Oct. 26, 2004) (stating that when confirming an award of foreclosure, the "Request for Entry of Judgment of Foreclosure" must include all remedial measures awarded by arbitrator), CVN Group, Inc v. Delgado, 95 S.W.3d 234, 238 (Tex.2002) (noting the requirement of judicial foreclosure does not make courts the exclusive arbiters of whether the technical requirements for perfecting a lien have been satisfied).
In jurisdictions that permit trust deed transactions, arbitration will enable the parties to resolve issues such as sufficiency of notice, redemption, relationship of the auction or sale terms, and treatment of deficiency or surplus, and other post-foreclosure procedures.
Arbitrator's Authority For Equitable Remedies
The three sources of an arbitrator's remedial authority are: (1) the terms of the written arbitration agreement, (2) the rules of the arbitral forum selected by the parties, and (3) the law applied by a court called upon to consider any challenge to modify or vacate the award.
The first consideration must be drafting the arbitration agreement. The Federal Arbitration Act (FAA) declares written provisions for arbitration "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Remedies available under the terms of the agreement may either be explicitly granted or may be provided in general, expansive terms. The United States Supreme Court grants deference to the parties' contract because the FAA embodies a liberal federal policy favoring arbitration agreements. Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24 (1983). When parties can anticipate the need for particular equitable remedies, they should be specific in providing explicit guidance to the arbitrator.
The selected arbitration rules also define the permissible basis for remedies. Rules, such as those of the National Arbitration Forum (NAF), give the parties access to expedited hearings, temporary restraining orders and other equitable relief.
NAF Code of Procedure Rule 27, for example, provides powers that are essential to deal promptly with preservation of collateral, replevin and protection of rights in commercial mortgage and equipment and real estate lease transactions.
NAF Code of Procedure Rule 20(d) provides, further, that "An Arbitrator shall follow the applicable substantive law and may grant any legal, equitable or other remedy or relief provided by law in deciding a Claim, Response or Request properly submitted by a Party under this Code." (Emphasis added).
Such rules provide a vital legal boundary to the arbitrator's award of remedies, and can be made applicable to particular occurrences under the contract to provide prompt replevin, repossession and recovery. In contrast, a rule that permits an arbitrator to award any remedy the arbitrator may "deem just" can lead to results the parties might not have anticipated nor agreed to at the outset. The U.S. Supreme Court has said that where specific guidance is not provided to an arbitrator, the arbitrator will need "to bring his informed judgment to bear to reach a fair solution of a problemÉ[because the] draftsmen may never have thought of what specific remedy should be awarded to meet a particular contingency." Steelworkers v. Enterprise Corp., 363 U.S. 593, 597 (1960).
The third source of authority for arbitral remedies is the decisional law of courts that have ruled in cases where one party is seeking to modify or vacate the award. The FAA - like modern arbitration laws of other nations - limits the powers of courts to modify or vacate arbitral awards. But those limits may not prevent modification and vacation where the underlying authority for the arbitrator (rule or clause) is vague. Vagueness invites a challenger to argue that the remedy is not "rational." See Jordan v. Department of Motor Vehicles, 123 Cal.Rptr.2d 122 (Cal.App. 2002). Thus, for example, courts may refuse to enforce an award of attorney's fees if there is no applicable statute and if the parties have not included that arbitral power in their agreement. Taylor v. Van-Catlin Construction, 2005 WL 1525024 (Cal. App. June 29, 2005).
One recent opinion concluded that arbitrators can be granted so much flexibility that, "[t]he fact that the type of relief granted by the arbitrator could not or would not be granted by a court of law of equity is not a ground for vacating or refusing to confirm the award." Blumberg v. Bergh, 2005 WL 1047592 (Tex.App., May 5, 2005). Commercial lawyers are understandably reluctant to commit their clients to wildly unpredictable outcomes either in court or arbitration. Fortunately, if the parties specify that they want the arbitrator to exercise specific remedies available under the law, then the arbitrator is bound to apply that dictate to fashion relief that is "rationally derived from the contract and the breach." Advanced Micro Devices Inc. v. Intel Corp., 9 Cal.4th 362, 383 (Cal. 1994).
An arbitration agreement that avoids the serious pitfalls of lawsuits and ensures parties with ready access to an expert neutral who can issue injunctions and award money damages can be easily drafted. In the commercial setting, parties have the right to specifically define which events will give rise to arbitral remedies of replevin, foreclosure, and damages. By incorporating an Arbitration Code of Procedure and careful clause drafting, commercial parties can have the benefit of arbitral awards granting damages plus interim and permanent equitable relief that are enforceable and precisely tailored to the parties' contract.
Philip B. Ytterberg is Vice President & Assistant General Counsel of the National Arbitration Forum.