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Explaining Arbitrator Awards May Satisfy Some

2/13/2008

Dow Jones

The question of whether arbitrators should have to explain their decisions has been hotly contested for years – but new data have emerged showing a widespread desire to learn their rationale.

Like many aspects of the debate over arbitration, the argument over explained decisions presents a juxtaposition between efficiency and fairness. While arbitration is meant to be faster and cheaper than the court system, many have argued that those advantages have eroded over the years. At the same time, some say they wish arbitration had some characteristics of court that they view as more fair.

Into the fray comes new numbers from a survey released last week in which 55% of customers and nearly 44% of non-customers said they’d like to understand the reasoning behind their arbitration awards. The study was commissioned by the Securities Conference on Arbitration, and more than 2,000 people answered the question about explained awards.

But a pending rule proposal to do just that has drawn protests from both sides, who argue that explanations could open the door to endless appeals, eliminating the efficiency that even critics see as a benefit to arbitration.

An explanation “lets the parties know…why it turned out that way,” said Tom Fehn, a Los Angeles lawyer who represents brokers and firms. “When people can understand things without an aura of mystery, they feel better.”

In 2005, the National Association of Securities Dealers – a predecessorto the Financial Industry Regulatory Authority, which now runs the industry’s arbitration forum – sent a rule to the Securities and Exchange Commission that if passed would require arbitrators to provide a written explanation of their decisions if either side requests it. The proposed rule drew nearly 200 comments, and is still pending as Finra reviews the responses, a spokeswoman for the self-regulator said.

Currently, arbitration awards must contain only basic information: the parties’ and lawyers’ names, a summary of issues, the damages and other relief requested and awarded and similar information.

Another pending Finra rule would require arbitrators to provide an explanation in instances where they grant a defense motion to dismiss before the claimant makes his case. But if the SEC approves the rule, arbitrators would only be able to grant such motions for three fact-based reasons, so the explanation wouldn’t provide great insight into the panel’s thinking.

It is rare for arbitrators to explain their decisions. Even though Finra has made awards publicly available online, the limited information that arbitrators typically include makes it difficult to glean any telling information from them.

“You need to know how the sausage is made,” said David Robbins, a New York City lawyer who represents investors and brokers in arbitration claims. “Cases aren’t black and white, cases are gray. You have a right to know” how the decision came to be.

Both investor and industry advocates acknowledge that it can be frustrating to receive an award that bears no resemblance to a party’s understanding of the case.

But some argue that providing explanations for awards, even if it made participants in arbitration feel better, wouldn’t necessarily improve the process.

“It’s understandable, it’s human nature” for people to want to have awards explained, said Kevin Carroll, managing director and associate general counsel at the Securities Industry and Financial Markets Association. “But the costs of implementing it are just too high.”

Chief among detractors’ concerns is the prospect of the losing party appealing – or threatening to appeal – a ruling. The grounds for which someone can appeal an arbitration award are narrow, but include an arbitration panel’s manifest disregard for the law. Large numbers of appeals would slow down the resolution of arbitration cases, negating the speed that is a key benefit of arbitration compared to courts of law, critics fear.

A written explanation “creates more opportunities for broker-dealers to file petitions to vacate, not because they know they’re going to win, but they can use it as a negotiation tool,” said Phil Aidikoff, an investors’ lawyer in Beverly Hills, Calif.

Along the same lines, Sifma’s Carroll and others are worried that arbitrators – who aren’t necessarily lawyers – wouldn’t know how to write explanations that could withstand legal scrutiny.

But Robbins sees a simple solution to that potential problem: training. Also, Fehn argues that the risk of endless appeals isn’t so daunting.

“If it seems clear they made a mistake, shouldn’t it be corrected?” Fehn asked. “Is the god of finality superior to the devil of wrongness? I don’t think so.”


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