Page 24: of Maritime Reporter Magazine (May 2014)

24 Maritime Reporter & Engineering News • MAY 2014

LEGAL BEAT

M ore than once, I have been asked to resolve a dispute in which my client was surprised to learn either that it could not force the other side into arbitration, or that arbitration was very different from its expectations.

Many companies devote hours (if not weeks and months) to negotiating what they consider to be the “substantive” terms of a contract, yet they pay little at- tention to the dispute resolution clause often included among boilerplate terms at the end. This is a risky practice, for rights that are carefully bargained for may effectively be lost if the “right” dis- pute resolution procedure is not negoti- ated at the outset.

When it comes to dispute resolution clauses, there is no one-size-fi ts-all so- lution. That which makes sense in one contract may not be appropriate for an- other, and the decision whether to arbi- trate or litigate may be more complex than anticipated. The temptation to “cut and paste” should be resisted. Instead, those negotiating the agreement must fully understand the dispute resolution options available, and their implications in different contexts. This is particularly critical with respect to mandatory arbi- tration, for although the rules governing courtroom procedures generally are pre- established and not subject to negotia- tion, arbitration is a creature of contract, and the parties are able to determine many of the procedures even before a dispute arises. The ability to negotiate those procedures up-front can be a gold mine for the astute, and a minefi eld for the uninformed.

Detailed here are several threshold is- sues that must be explored when nego- tiating a dispute resolution clause, and several options that might be considered.

How important is specialized knowledge?

Perhaps the greatest potential benefi t of arbitration is the ability to select the person(s) who will resolve the dispute.

This is important because judges and juries are not likely to have expertise in the maritime transportation industry, and they may have no experience operating a business. This may not be important in some cases; but in others, technical competence will be important to under- standing the evidence and resolving the dispute. For example, shipbuilding con- tracts, technical management contracts, and charters often incorporate mandato- ry arbitration clauses precisely because judges and juries are unlikely to possess the knowledge and experience necessary to evaluate the evidence and reach the “right” conclusion—at least not without substantial briefi ng by counsel, and testi- mony by experts. In such cases, arbitra- tion before one or more industry experts may provide a more effi cient and satisfy- ing result.

Thus, some charters require arbitra- tors to be “commercial men,” which ex- cludes attorneys. And there are arbitra- tion solutions specifi cally tailored to the maritime industry (e.g., the Society of

Maritime Arbitrators, Inc.), which offer both technical expertise and a forum for resolving cross-border disputes in which neither side is perceived to have a “home court advantage.”

Although arbitration may be preferred by maritime industry operators in some contexts, this does not mean that it offers the best solution in all contexts. Even a shipyard has business relationships (such as with catering and security fi rms) that could lead to disputes that would not require any particular industry expertise to resolve.

How important is confi dentiality?

A compelling advantage of arbitration is the option to keep proceedings confi - dential. Although there are contexts in which an arbitration decision can even- tually make its way into a courtroom, generally neither the parties’ fi lings nor arbitration hearing are a matter of pub- lic record, and a well-crafted arbitration clause can require that the parties keep their dispute and its resolution confi - dential. This can provide great value to a company that prefers to avoid public- ity or fears developing a reputation as a litigious actor or easy target. Further, the ability to keep dispute resolution proceedings confi dential can be critical when the dispute involves commercially sensitive matters, such as business strat- egy, cost and pricing models and the like.

Confi dentiality is not always desirable, and there are exceptions. For example, decisions of the Society of Maritime

Arbitrators generally are published, al- though parties can agree to full or lim- ited confi dentiality. This issue should be considered at the outset, and not post- poned until a dispute has arisen.

How important is cost?

Minimizing legal expense is always important, but the issue merits focused attention when selecting a dispute reso- lution procedure. Although arbitration often will be less expensive than litigat- ing in court, that will not always be the case.

Arbitration costs that would not arise in a courtroom include hourly fees for the arbitrators, as well as the arbitral forum’s own case administration fee.

Depending on the number and qualifi ca- tions of the arbitrators and the amount in dispute, these fees can escalate rapidly.

In contrast, judges presiding in a court- room are not paid by the parties, and the courthouse fi ling fees generally pale in comparison to those assessed in arbitra- tion. The difference may not be a decid- ing factor in most cases, but it is worth considering nonetheless.

Of greater signifi cance is the common misperception that arbitration will mini- mize attorney fees. Perhaps, but perhaps not. Often, discovery of documents and persons is narrower in arbitration be- cause arbitrators are not constrained by codifi ed rules of evidence and proce- dure. That alone can provide substan- tial cost savings, which would justify a preference for arbitration. Similarly, the motions practice that often attends court- room litigation is frequently more lim- ited in arbitration. But some courts have a reputation for placing the same sort of limits on discovery and motions practice that are often employed in arbitration, and in these courtrooms litigation may be as cost-effi cient as arbitration. (The federal court in Alexandria, Virginia is known as the “Rocket Docket” for a rea- son).

Arbitration proceedings are creatures of contract, and the parties are able to negotiate what the process will look like.

In some cases, you may wish to negotiate the extent of available discovery rights.

For example, in a complex dispute the parties may agree to the same expan- sive discovery rights that would apply in court because they fear that artifi cial constraints would prejudice their ability to succeed on the merits. The same is true of motions practice: although ar- bitration procedures often limit (in the name of effi ciency) the parties’ ability to fi le dispositive motions, the parties may wish to negotiate such a procedure. In- deed, one colleague recently complained

To Litigate or Arbitrate

That is the Question

BY ALAN M. FREEMAN

MR #5 (18-25).indd 24 4/30/2014 2:35:03 PM