Arbitration is Stronger in 5th Circuit, but is there a Dark Side?

On March 17, 2009 by

Does Arbitration Have Warts?

Over the past twenty years, Alternative Dispute Resolution processes like arbitration have become mainstream in the American legal system.

Once considered a creative solution to the expensive and unpredictable legal system, it appears that these ADR procedures may themselves have warts.

The question of whether the “vanishing trial” phenomenon is a good or bad thing is not necessarily a new question…but the latter description does seem to be gaining some steam.

Take for example an interview in this month’s ABA Journal with “Lion of the Bar” Joe Jamail, who had this to say about arbitration and mediation:

Do you know what the root of mediation is?  Mediocrity!  The move to replace jury trials with mediation and arbitration is actually an effort by elitist in our society to control how disputes are decided.

Mr. Jamail isn’t the only one with this opinion of ADR.  In 2007, the Arbitration Fairness Act was introduced to the U.S. Senate and, according to the Wall Street Journal, would effectively do away with mandatory arbitration agreements used widely in many industries.

This legislation and opinion isn’t unprecedented – take, for example, the Brazilian Arbitration Act and its disfavor for arbitration agreements in “contracts of adhesion.” These opinions, of course, notwithstanding the recent study that found arbitration to be mildly favorable to consumers.

Also, remember that one of the most significant changes to the AIA contracts documents in its 2007 edition was to the dispute resolution articles, now allowing parties the option of selecting ADR.

Arbitration Agreements Grow Stronger in 5th Circuit

Despite the rising controversy over whether arbitration and ADR are positive or negative alternatives to traditional litigation, the U.S. Fifth Circuit Court of Appeals published two important opinions this past month regarding agreements to arbitrate.

First, in Agere Systems, Inc. v. Samsung Electronics Co., Ltd, the 5th Circuit held that the question of arbitrability should be decided by an arbitatror, and not the court.

Second, just last week in Citigroup Global Markets, Inc. v. Bacon (appeal from S.D. Tex), the 5th Circuit reserved a district court decision vacating an arbitrator’s award for “manifestly disregarding the law,” stating that the manifest disregard of law by an arbitrator is not a reason to vacate an award.

Law.com published an article about this important ADR opinion, either underlining or exaggerating the ruling by stating:

Abandon all hope, ye who seek to overturn an arbitration award, because the 5th U.S. Circuit Court of Appeals has ruled that manifest disregard of the law by arbitrators is no longer a ground for vacatur under the Federal Arbitration Act.

The 5th Circuit’s March 5 decision in Citigroup Global Markets Inc. v. Bacon will make parties think twice — or three times — before agreeing to submit to arbitration to settle their cases.

What Does It All Mean?

This much appears clear: (a) The role of ADR is growing; (b) the debate of its value rages; and (c) arbitration agreements are stronger than ever.

At the Construction Law Monitor, we have discussed ADR options and their pros and cons. When a dispute arises, it can be costly, lengthly and/or devastating to your company. It’s important for all businesses to consider the dispute resolution options out there.

Whether arbitration is the best option for your business or construction project should not be a foregone conclusion.

Like litigation, arbitration and ADR has its fair share of warts, and with the most recent rulings from the 5th Circuit, those considering arbitration ought be cautious in case the nay-sayers turn out to be right.

On Mar 17, 2009

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