You are negotiating a master service agreement, exploration agreement, farmout, or other oil-field contract, and the other side proposes that all disputes be resolved by arbitration. Should you agree? 

The answer? It depends. I try lawsuits, advocate in arbitrations, and preside as an arbitrator, so I’m often asked this question. The answer isn’t the same in every case. It depends on the circumstances, but there are factors to consider.

The Advantages

  • It is private. If a lawsuit has ever been used against you as a tool to embarrass and intimidate, you know what I’m talking about. Generally, statements in pleadings and testimony by witnesses are privileged against claims for defamation – not perjury, but that is entirely another matter. Salacious or scandalous assertions, no matter how untrue or irrelevant, that slither their way into the court’s files are public, and can cause major extra-judicial harm to the receiving party. If you want privacy, arbitration is the way to go.
  • No extra innings. You file your papers, conduct your discovery, have your hearing, and it’s over. No new trials, appeals, cross appeals, or petitions for review.
  • It’s quicker and cheaper (in theory, anyway).  If at least one party is willing and the arbitrator is strong, reasonable limits on the manner and amount of pre-hearing discovery can lower the cost of the process.
  • It is beneficial when the subject is arcane. I once represented an operator in a lengthy arbitration over gas plant accounting. Try to explain that to a jury of 12 “regular people” in a rural Texas county. Our panel was a landman, a future FERC commissioner, and a gas-plant accountant. They got it right (code for “we won”). A jury might have done the same, but I’m not sure they would have understood why, and the odds weren’t as good.

Before we continue, Opening Day is around the corner; that bleak and wintry interval between the end of college football and the beginning of baseball is over. Rejoice.  

The Disadvantages

  • No instant replay. If the arbitrator gets it wrong there is no appeal; you are waiving the full judicial process afforded to parties in litigation, which includes protections against a bad ruling. A wacky legal analysis that a court of appeal would laugh at? Too bad; it’s over. An “out of control” monetary award? Ditto. It’s not hopeless; there are a few limited bases for overturning an arbitrator’s ruling, but it’s difficult.
  • It is not necessarily more efficient. If the parties and their lawyers allow it, the costs, hassles and delays can rival those of litigation.
  • The arbitrator is a professional. Why is this a disadvantage? A party having a claim with high emotional appeal – think “jury appeal” – will want a jury. Say the smell of sulfur follows your opponent when he enters the room. “The jury will hate him” you say. You want a jury, the other side won’t, especially if he as good legal bases for resisting your claim. It is generally considered that an arbitrator, usually a trial lawyer who has seen worse, is more immune than a jury to the emotional component.

In the end, whether to arbitrate depends on what you are trying to accomplish. Seek legal advice before deciding.