The Future of Discovery in Arbitration
Posted Apr. 4th 2013
BY: GENE J. ESSHAKI, ESQ.*
ABBOTT, NICHOLSON, QUILTER, ESSHAKI & YOUNGBLOOD, P.C.
The benefits derived from utilizing arbitration as a dispute resolution mechanism, especially in complex commercial disputes, include the following:
- Expediency. Historically, a dispute could be fully resolved through arbitration in significantly less time than it would take if tried to conclusion in a state or federal court.
- Efficiency. Professionally trained arbitrators are much more efficient in handling a complex commercial dispute from start to finish and have more time available to resolve individual disputes than state or federal court judges.
- Cost Savings. Even though filing fees may be required by an administering organization and the arbitrator is paid market rates for his services, the limitations imposed upon discovery in the arbitration process and the expedited time to completion frequently translates into significant cost savings.
- Subject Matter Expertise. The parties could draft their documents to establish a process or could voluntarily agree upon arbitrators that have subject matter expertise particular to a specific case. Trial judges cannot be experts in every case that comes before them; however, an industry-specific arbitrator can be selected for every arbitration that is filed. This subject matter knowledge is often extremely valuable to the parties.
- Finality. An arbitration award is generally final and binding upon the parties, subject to certain limited exceptions, and an appeal process through state or federal courts that can sometimes consume 4 years or more does not exist.
- Lack of Jury. Considered a pillar of the American Judicial System, a jury is often not effective in complex commercial disputes because jurors do not possess the specialized knowledge or expertise required to reach a reasonable resolution. Parties are often willing to exchange the right to a jury trial for an industry-specialized arbitrator knowing that they will receive a well analyzed award.
Commentators have recently decried that arbitration with its now “unrestricted” discovery process is becoming much more akin to full scale state and federal litigation. They assert that permitting litigants to conduct multiple depositions, issue interrogatories, document requests and requests to admit, is converting the arbitration process into broad based litigation, at the expense of the cost savings that was originally built into the process. Why should a party engage in arbitration, surrender his right to a jury trial and waive any appeal rights if the cost of the arbitration will be equal to or even greater than full scale civil litigation?
Having practiced in the field of arbitration for almost 40 years, it is this author’s personal observation that the arbitration process is simply expanding to address the ever increasing complexity of cases that are being filed. Thirty years ago, arbitration generally involved disputes between residential buyers and sellers, small purchase order disputes and limited commercial issues, where the amount in controversy did not justify full scale discovery and pre-trial preparation.
Today, however, commercial cases that are submitted for resolution through arbitration often involve multi-million dollar demands. No litigator would be comfortable submitting a $10 or $20 million dispute to arbitration, knowing in advance that discovery would be limited to a simple document exchange. Litigators on both sides need to have a full understanding of their opponent’s case, as well as the testimony they will face at the hearings in order to prepare their case appropriately.
Nevertheless, administering organizations are taking steps to curtail the use of discovery in arbitration as a way of limiting costs to the parties. By way of example, the International Center for Dispute Resolution, the international arm of the American Arbitration Association (“AAA”), does not authorize the use of depositions in its proceedings. Further, the AAA recently published new rules on commercial arbitration that severely limit the discovery processes available to litigants. See: www.adr.org/commercial for a complete set of the new rules.
In general, the new rules, effective October 1, 2013, do not authorize an arbitrator to order interrogatories, requests to admit or depositions. New Rule 22 authorizes an arbitrator to order and oversee a document exchange between the parties.
Under the prior AAA rules, in complex cases involving more than $500,000, parties could conduct any discovery that was mutually agreed upon and the arbitrator was specifically authorized, upon good cause shown, to order depositions and interrogatories. See: 2009 AAA Commercial Rules, L-4. Both of these provisions have been deleted from the 2013 version of the Rules.
Under the new rules, in those large complex cases in excess of $1,000,000, parties are simply required to exchange copies of all exhibits they intend to submit at the hearing at least 10 days in advance (L-3(c)) and the panel presumably has the power to order the document exchanges as permitted under Commercial Rule R-22. Finally, under complex case Rule L-3(f), “In exceptional cases, at the discretion of the arbitrator, upon good cause shown and consistent with the expedited nature of arbitration, the arbitrator may order depositions to obtain the testimony of a person who possesses information determined by the arbitrator to be relevant and material to the outcome of the case. The arbitrator may allocate the cost of taking such a deposition.”
New Rule L-3(f) will impose a heavy burden upon litigators seeking to take the pre-hearing testimony of their opponents’ witnesses in arbitration. “In exceptional circumstances” sets an extremely high standard for obtaining a deposition, let alone multiple depositions. The net result will be that any funds saved in not engaging in pre-hearing depositions will likely be expended in the hearings where litigants will have to examine witnesses in front of the panel as if in deposition in order to gather all of the testimony that may be critical to their respective cases.
In stark contrast to the new rules of the AAA, Michigan’s recently enacted Revised Uniform Arbitration Act (“RUAA”) MCL 691.1681 et seq., (“The RUAA”), specifically Section 17(2)), authorizes an arbitrator to permit depositions of any witnesses to be taken for use as evidence at the hearings. The RUAA, Section 17(1), further grants the arbitrator the authority to issue subpoenas for the production of documents or the taking of testimony for use at the hearings.
The Federal Arbitration Act (“FAA”), 9 USC Section 1, makes no provisions whatsoever for the management of an arbitration, but simply authorizes parties to a contract to agree to arbitrate their disputes and for courts to enforce those agreements. Since the FAA applies to interstate commerce, given its broad definition, arguably any case can fall under the FAA. In such cases, the parties will have to determine which rules will apply to their arbitration proceedings and draft their contract clauses to implement their often competing goals.
Every lawyer who as a matter of course inserts an arbitration clause into their transactional documents must now consider the objectives of their litigator partner in drafting that clause and in dealing with issues of pre-hearing discovery. As indicated, no litigator in a multi-million dollar case wants to participate in a final and binding hearing without knowing the other side’s case in chief. To that end, scriveners need to consider drafting arbitration clauses that specifically provide for pre-hearing discovery including interrogatories, document requests and depositions. Otherwise, the attorney litigating the case will be trying it in the dark. This does not necessarily insure an appropriate outcome or a satisfied client.
It remains to be seen whether the push to reduce pre-hearing discovery in arbitration will have the result of increasing the number of cases filed each year or the opposite effect in reducing case filings in order to avoid the prohibitions against pre-hearing discovery.
* Gene J. Esshaki is a Graduate of Wayne State University Law School. Since graduation, he has continuously practiced law in the Detroit Metropolitan Area, specializing in complex commercial litigation and alternative dispute resolution. He is a neutral Arbitrator on the complex case panels of the American Arbitration Association and the International Center for Dispute Resolution. He has an active practice in mediation and is appointed frequently by state and federal judges to mediate some of their most complex commercial cases. Gene is a member of the American Board of Trial Advocates and a frequent Lecturer for ICLE on ADR topics. He is a founding shareholder in Abbott, Nicholson, Quilter, Esshaki & Youngblood, P.C., located in Detroit, Michigan.