Contracts: Staying Out of Court

As every businessman knows, litigation of commercial quarrels can be agonizingly slow and annoyingly expensive. In many U.S. cities it takes months or years to bring a suit to trial; beyond that lie the delays of appeal. Meanwhile, costs pile up and claims remain unpaid. There is many a program for speeding up justice but reform, too, moves slowly, if at all.

Faced with delay and frustration in the courts, more and more U.S. firms are using arbitration as a means of resolving disputes. Even for the loser, it saves time and money.

Ready for Sponges. Principal agency for commercial arbitration in the U.S. is the nonprofit American Arbitration Association, founded in New York in 1926 with an imposing list of sponsors, including two future Chief Justices of the U.S., Charles Evans Hughes and Harlan Stone. With branch offices in 18 cities, the A.A.A. last year arbitrated nearly 1,000 commercial disputes. Several industries, including textiles, printing, rubber and shipping, maintain their own arbitration systems.

When a dispute is brought before the A.A.A., three arbitrators listen to both sides, study the evidence and pronounce judgment. If the evidence cannot be brought into the hearing room, the arbitrators go out to examine it on the spot. One panel spent hours in a warehouse poking through bundles of broom straw that the purchaser claimed had been ruined by rats.

The whole arbitration process often takes only a few weeks. Where speed is urgent, the Arbitration Association can arrange a quick hearing and get a conflict resolved within a few days or even a few hours. The resulting savings in legal costs often more than cover the A.A.A.'s modest fees, which are based on the amount of money in question: the fee in a $1,000,000 case would come to only $1,725.

Arbitration offers the further advantage of privacy. Charges aired in a courtroom can damage a firm's reputation even when it is ultimately found to be blameless. In arbitration, even the loser's good name is safeguarded: hearings are closed to the public and awards are kept secret. As some lawyers see it, the greatest merit of arbitration in business disputes is that experts decide the outcome. In a dispute over faulty workmanship in houses, for example, the A.A.A. panel consisted of an architect, a building-materials manufacturer, and an insurance executive specializing in housing matters. To make sure it has the right experts to rule on any imaginable controversy, the A.A.A. maintains a list of 13,000 available arbitrators with special knowledge in 700 separate fields, from antiques to sponge gathering to nuclear physics.

Whatever area of business they represent, A.A.A. men are practicing amateurs when it comes to settling commercial arguments. Their pay usually amounts to just enough to cover out-of-pocket expenses. Most of them are retired or well-enough established so that they do not have to go to the office every day. They serve as arbitrators for prestige or simply because they like the work.