THE ROLE OF ARBITRATIO I LITIGATIO TODAY

By Joshua Kutchin and Rebecca Raper

I. The ADR Movement

In the past couple of decades as the number of civil cases has risen, Texas and other states have embraced the “Alternative ” or “ADR” movement as a docket control measure. Essentially, the ADR movement advocates the resolution of tort and commercial suits through means other than a jury trial or other judicial determination. ADR is a term that includes many varied processes, most notably and . Mediation has, of course, become a cornerstone of litigation, with practically all Texas state court cases being ordered to mediation prior to trial. While arbitration is less familiar to most people, it is becoming more and more a feature of the Texas civil justice system. In this regard, both federal and state law explicitly endorse binding arbitration and arbitration agreements are becoming standard in many areas - loan documents, purchase and sales contracts, franchise agreements, bank customer agreements, credit card agreements, construction contracts, employment contracts, employee benefit plans, title policies, attorney fee agreements and numerous other contracts.

II. The Arbitration “Sell”

Those who advocate arbitration as an alternative dispute mechanism generally cite two rationales: cost and timing. Arbitration is commonly thought of and touted as being cheaper and faster than traditional litigation. However, while there is not a lot of empirical data on the question, there is some reasonably significant debate as to whether binding arbitration really delivers any cost or time savings. In this regard, in 2002, the public interest group Public Citizen published a document entitled “The Cost of Arbitration” that suggests that in many cases arbitration is much more expensive than is traditional litigation. Likewise, most attorneys who have found themselves in arbitration proceedings can relate tales of delay that rival the worst examples of drawn-out court cases.

III. Coverage Implications

A question that frequently arises for claims professionals is whether coverage exists for arbitration proceedings. The answer in any particular case will necessarily depend on the relevant policy language. However, a short answer is that arbitration proceedings are frequently

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covered. Many policies provide coverage for arbitration, with the key language being in the definition of the term “suit.” A CGL policy, for example, might provide:

“Suit” means a civil proceeding in which damages because of “bodily injury”, “property damage”, “personal injury” or “advertising injury” to which this insurance applies are alleged. “Suit” includes:

a. An arbitration proceeding in which such damages are claimed and to which you must submit or do submit with our consent; or b. Any other alternative dispute resolution proceeding in which such damages are claimed and to which you submit with our consent.

In Texas, if a policy does provide coverage for arbitration generally, the “eight corners” rules still apply; one just compares the policy language to the “statement of claims.” See, e.g., Gore Design Completions, Ltd. v. Hartford Fire Ins. Co ., 538 F.3d 365, 369 (5th Cir. Tex. 2008).

IV. Texas Arbitration Act

The Texas Arbitration Act (“TAA”) became effective in 1966, confirming a long- standing common law acceptance of arbitration as a useful dispute resolution method. The legislation was substantially strengthened in 1997. Notably, the TAA explicitly legalizes arbitration agreements in Texas, providing that “A written agreement to arbitrate is valid and enforceable if the agreement to arbitrate a controversy that exists at the time of the agreement, or arises between the parties after the date of the agreement. A party may revoke the agreement only on a ground that exists at law or in equity for the revocation of a contract.” TEX . CIV . PRAC . & REM . CODE §171.001.

The TAA includes a number of specific provisions that spell out when an agreement to arbitrate is valid, the powers of Texas courts with respect to arbitration agreements, arbitration procedures, and the enforceability of arbitration awards:

• TAA Agreements o Must specifically say that there is an agreement to arbitrate. o Need not be signed. o Need not be contained in any particular document or any particular form – con reference other documents. o Must be mutual – not good enough that only one party agrees to submit. • Court powers under TAA: o Compel arbitration.  No discretion but to compel if (1) valid agreement in place and (2) dispute falls within terms of agreement.

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 If there is valid agreement that encompasses claim, arbitration can only be avoided on a showing by the party wanting to avoid arbitration that the agreement can be revoked. Revocation grounds include: • Fraud. • Waiver. o Strong presumption against waiver – must “substantially invoke litigation process.” o A party does not necessarily substantially invoke the judicial process by taking pre-trial actions in a suit brought against that party. Thus, filing a motion to transfer venue, mediating a case, engaging in written discovery, and conducting depositions (at least where such discovery was available in the arbitration or irrelevant to the arbitrable claims) has been held to be insufficient to waive the right to compel arbitration. o Substantially invoking the judicial process can occur “when the proponent of arbitration actively tried, but failed, to achieve a satisfactory result in litigation before turning to arbitration,” such as by moving for summary judgment or seeking final resolution of the dispute. • Unconscionability. o There is no precise definition on unconscionability. Generally, the test is whether the clause at issue is so one- sided as to be unenforceable, judged in the light of the general commercial background and the needs of the parties in the circumstances existing at the time the contract was made. o “Know it when you see it.” • Material breach. • Duress. • Illegality. o Stay arbitration.  If an arbitration proceeding is brought and a party thinks that arbitration is improper, it can bring a petition to stay the arbitration. o Appoint arbitrators.  Only if there is no provision in the agreement and the parties cannot come to some understanding about appointment. o Enforce arbitrator’s powers.  Compel witnesses.  Issue subpoenas.  Issues of attachment, garnishment, sequestration, etc. o Confirm awards. 3

o Vacate awards. o Moodily and correct awards. o Hear appeals concerning .

• TAA Procedures. o Agreement usually governs appointment of arbitrators, but court can do so on application. o Agreement can govern procedures. o All hearings shall be conducted by all arbitrators. o Unless agreement provides differently, arbitrators set schedule, only have to give 5 days notice of hearing. o Hearing may be adjourned or postponed for good cause. o Arbitration proceeds even if one party does not show up. o Each party has the right to be heard, present evidence, cross-examine any witness, and be represented by an attorney. o Witnesses testify under oath and can be subpoenaed by arbitrator or ordered by arbitrator to testify by deposition. o Discovery under the AAA commercial rules is termed an “Exchange of Information” and is governed by Rule 21. This rule allows the arbitrator to direct discovery “[a]t the request of any party or at the discretion of the arbitrator, consistent with the expedited nature of arbitration.” Thus all discovery requests must be approved by the arbitrator, who has a great deal of discretion in the scope of discovery. The arbitrator must direct discovery consistently “with the expedited nature of arbitration,” but there are few checks on the use of this power. o The arbitrator, if authorized by law to do so, may subpoena witnesses or documents at the request of a party or independently. • TAA Awards. o Award must be in writing, signed by each arbitrator, and delivered to each party. o No need to specify grounds or findings. o Attorneys fees only awarded if allowed for in agreement and if would be recoverable under Texas law. o Once handed down, can be entered as judgment by court, clarified, modified or appealed. • Appeals of TAA Awards. o Arbitrators’ award “shall” be confirmed by court except when grounds are offered for vacating, modifying, or correcting the award. o If correction is warranted, application must be made within 90 days after award is delivered.

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o Corrections can be of “evident miscalculations” or “evident mistakes in the descriptions of a person, thing, or property” referred to in the award. o Award can only be vacated on showing that:  Award was obtained by corruption, fraud, or other undue means.  Rights of parties were prejudiced by evident partiality of arbitrators.  Arbitrators exceeded powers, refused postponement after showing of good cause.  There was no agreement to arbitrate and the issue was raised at arbitration.

In light of these rules, challenges to arbitration awards are rarely successful. In fact, even a mistake in law is not a proper ground for overturning an arbitration award.

V. Conclusion

Like mediation, arbitration is inherently neither good nor bad—it is simply one of the many tools available for use in managing claims and litigation. When used proactively and managed carefully, arbitration can often promote the stated goals of prompt and cost-effective dispute resolution. However, experience tells us that parties who are “just along for the ride” often end up with unsatisfactory results, including long delays and rushing attorneys’ fees. Experienced counsel, knowledgeable about the subject matter and the intricacies of the arbitration process, is crucial.

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