By Greg Crosslin
March 1, 2005
For generations, the most frequently used method of dispute resolution has been litigation. With increased expenses over the last 10 years, however, less-expensive dispute resolutions have become increasingly popular. Many pest management professionals (PMPs) now include arbitration clauses in their contracts, but they have often done so without really examining how the process works.
HOW IT WORKS
Arbitration is a private (meaning no governmental bodies are involved) dispute process in which the parties present claims and defenses to an arbitrator (or panel of arbitrators) who actually decides the case. Arbitration is generally binding, though it isn't always.
PMPs can select arbitrators in a number of ways. They are often experts in specific industries and are selected directly by the parties or their lawyers. More often, they are employed and/or "approved" by an organization that offers services, such as the American Arbitration Association.
PMPs should analyze which arbitration services they need carefully because many are often expensive. Although parties are generally required to pay various filing fees, forms, administrative costs and arbitrator's fees at the inception of proceedings, many agreements provide for dividing the costs after the case is decided. This needs to be well thought out and included in the original contract. Arbitration is not necessarily inexpensive, and PMPs must understand all the costs involved before including arbitration in contracts.
Typically, claimants who initiate arbitration will issue a statement of claim explaining the dispute, identifying the amount of money involved and the remedies or resolutions sought. Respondents (typically the defendants) can file answering statements and assert cross claims if applicable. Arbitration can involve multiple parties, but it usually involves only the homeowner and PMP.
Initially, parties in arbitration didn't have to live by the rules of discovery and still may not have to unless it's stipulated up front. Under the rules of virtually all arbitration organizations, arbitrators may direct parties to produce documents and information, identify witnesses and allow depositions and require formal exchanges of written discovery requests and responses at their discretion. This is a major difference between litigation and arbitration.
These rules can change depending upon the amount of money involved. Some special arbitration rules that don't allow for discovery apply for smaller amounts of money. It's therefore necessary to review the rules and procedures of the sponsoring organization prior to including them in any agreement because they can differ significantly from organization to organization. This is something PMPs must address before inserting arbitration into contracts.
After documents and information are produced and exchanged, arbitrators conducts hearings similar to trials — parties may call witnesses and offer evidence. Rules governing the admission of evidence in courts typically do not apply in arbitrations, but they can be included up front in agreements. The presentation of evidence can be loosely defined and is entirely up to the arbitrator — what the arbitrator says goes.
Upon conclusion of the hearings, arbitrators will issue awards containing all the remedies that they deem appropriate, together with their assessments of appropriate costs and fees. Typically, parties bear their own litigation costs, but arbitrators may also assess lawyers' fees, expert fees and other costs to the losing party according to requests from the parties, statutes or pre-arbitration agreements.
Arbitration has often been labeled "trial by ambush" because the usual rules of evidence that apply to court proceedings do not necessarily apply to arbitration. Arbitrators are often free to base their decisions on testimony and documents too unreliable for the courts.
Binding arbitration cases run significant risks because arbitrators are not required to justify their decisions as judges are. This often leads to awards that would not normally survive outside scrutiny.
Finally, and perhaps most importantly, awards by arbitrators are not appealable unless fraud, prejudice, misconduct and/or manifest disregard of the law is present. As a result, appeals of arbitration awards are rare.
All these factors are important to understand when considering including binding arbitration in contracts. Each state controls the arbitration process, and state laws should be consulted before making any decisions.
WEIGH THE RISKS
No matter your choice, make sure you understand the advantages, disadvantages, inherent costs and risks involved with all forms of dispute resolution. You must do a cost-benefit analysis based on real issues, concerns and facts before you decide to include arbitration as the dispute resolution remedy for all your claims.You also need to address the impact it may have on your insurance coverage. Determine, after consulting your claims and litigation history, if it really is something you need. Whatever your choice, the decision should be well researched before you decide on the appropriate resolution process for your company.