Efficient Arbitration Part IX: Should You Skip Administration?

shutterstock_348379805One expense in arbitration lawyers often seem to immediately hit on when thinking of ways to make arbitration less expensive is administration fees. Why pay for an arbitral forum like AAA, ICDR, or JAMS to administer the arbitration?  After all, filing fees are still pretty cheap in court.  Administration fees are not that cheap.  This leads many lawyers to propose a clause that says, in effect, the arbitration will be conducted under the rules of the AAA (or ICDR or JAMS) but not under its authority or administration.  It seems like you could eliminate some costs right off the bat with this simple clause.

But there are a number of reasons not try to economize in this way.

Rules problems.

The “under the rules but not the authority” proposition doesn’t work very well in practice. Under most rules, the role of the case administrator is “baked in.”  In other words, the case manager and organization have a specific role to play that is referenced in the rules.  Some of the rules don’t make much sense without that role.  At very least, you will need to go over the rules and somehow except those that assume administration by the organization if you want to adopt an organization’s rules but not its administration.

Arbitrators can be expensive administrators

Somebody has to administer the arbitration.  Phone calls must be set up, schedules must be set, hearings must be coordinated, and billing matters need to be addressed.  If you are paying an arbitrator to do this at arbitrator rates, you likely won’t save any money.  Many arbitrators have their assistants take care of this, but you can’t be sure in advance.

Who decides?

It can be essential that there is someone to decide any disputes between a party and the arbitrator.  I’ll give you a couple examples inspired by real life.

Assume this. The arbitration has been going for some time.  The arbitrator has made a pre-hearing ruling or two that one party is bound not to like.  That party then comes up with a new witness.  The arbitrator does a check of her firm’s conflict system and learns that witness was employed by a former firm client.  The arbitrator, of course, discloses this right away.

The disappointed party indicates the arbitrator should resign based on this appearance of impropriety.  If there is no administrator, it is up to the arbitrator to decide what to do.  It appears that the party may be using this situation to “punish” an arbitrator that made some pre-hearing rulings against it.  Yet, an argument could be made that there is it a least a question whether this could affect the arbitrator’s impartiality.

This is awkward for both the party and the arbitrator.  The party may feel it has a genuine issue here, but it is a tricky thing to raise directly with the arbitrator.  Raising the issue requires it to accuse the arbitrator of being partial, or at least appearing to be so.  The arbitrator is, for once, herself involved in a controversy, rather than objectively deciding disputes involving others.  And one might even wonder whether the suggestion of failure to be impartial might affect the arbitrator’s impartiality going forward.

On the other hand, if there is an administrator, the organization decides.  The arbitrator isn’t involved. She remains above the fray, just where an impartial decision maker should be.

Let’s take another example. During a phone conference on discovery, one of the lawyers dislikes the arbitrator’s ruling and, then and there says, “This ruling is wrong and unfair.  You should recuse yourself.  You take the other side’s position on everything.  And you don’t seem to even know what you are doing.”

(Okay, so you are probably wondering whether something like this could really happen.  It has.  Honest.)

With an administrator, this is easy.  The arbitrator can just issue an order that any requests for recusal must be directed to the case manager.  End of problem.  Without administration, you likely will have a continuing dispute.

Paying a fair share

It is fair to pay some of the expense of improving the arbitration system.  The AAA, for example, spends a great deal of time and money on vetting arbitrators, training arbitrators, perfecting rules and guides, and generally improving arbitration.  This costs money. Simply riding on those efforts and using the organization’s rules without paying anything doesn’t strike me as quite fair.

Access to experienced arbitrators

Administrative organizations spend, as noted, a fair amount of effort vetting and training arbitrators. AAA, for example, will work with the parties to determine the type of experience and expertise needed and provide a list of candidates and their detailed resumes.  There are procedures in place for the parties rating and choosing an arbitrator or panel from the list.  In some cases, the parties can ask candidates to answer agreed-on written questions or even jointly interview candidates before choosing.

By contrast, if the parties can’t agree on an arbitrator on their own, they may well be  headed to court to have the court choose an arbitrator.  There is no surer way to destroy the cost advantages of arbitration than to have a lawsuit right out of the chute to decide who the arbitrator will be or other issues regarding the arbitration.

Possible false economy

Perhaps the problems identified above won’t arise in your arbitration. In most arbitrations, they don’t. But if one of them does arise, or something similar arises, you will likely find that foregoing administration was a false economy.  So, of all the cost-saving devices we have considered so far, I can’t recommend this one.

By way of full disclosure, I should note that I get most of my appointments through AAA, so you can factor that into my comments here. But I have seen enough times administration has solved the sorts of problems or provided the advantages I mention above that I think the advice remains sound.