Arbitration Is Forever

While boards may not actually face the decades-long run of Jarndyce vs. Jarndyce, the seemingly endless lawsuit that is the highlight of Charles Dickens’s Bleak House, they may sometimes feel like they do. Indeed: serious litigation can be a budget-busting and morale-destroying experience.

So, why not arbitrate? After all, arbitration is comparatively simple, and best of all, its decision is the final word. An arbitrator has the authority to make a decision that is binding on the parties and that can be enforced by the courts. In fact, one of the biggest benefits is its finality.

Here’s how arbitration works: both parties agree to meet with an arbitrator – often a retired judge or court-appointed attorney – who then listens to both sides, weighs any evidence brought in, asks questions, and renders an opinion. You can use your lawyer to argue the case, but it is so informal that you could also argue it yourself – if you’re good with words and at marshalling your material.

There are many reasons why your board should consider making arbitration a requirement in disputes at your property. Primarily, it is cheaper than litigation. Think of the co-op shareholder who fought the board over who was responsible for installing window guards, and you can smell the expense. “The cost of installing the window guards was approximately $919.56,” says Scott Mollen, a partner at Herrick, Feinstein, who teaches a course in alternative dispute resolution at St. John’s University School of Law. “The co-op incurred a legal bill of $73,547.” Even more recently, a shareholder dispute over the use of a small vestibule involved a co-op board in six years of litigation and six-figure legal fees.

Another positive reason is the privacy aspect. Because the hearings are completely confidential and no reports are published, disputes don’t become public spectacles. “When the board brings a claim against a unit-owner, the unit-owner will [generally] counter-claim for mismanagement or other misconduct by the board,” Mollen notes. “Publicity about building problems does not enhance the value of people’s units.”

The system also features looser rules of evidence. An arbitration forum is very flexible: hearsay evidence, for example, normally precluded in a court of law, can be taken into account by the arbitrator in arriving at a decision. In that way, arbitration can allow for a much more comprehensive evaluation of the situation than litigation does.

So why don’t more people use it? For one thing, arbitration’s very finality makes some lawyers uncomfortable recommending it to their clients.

Another reason is there is a whole spectrum of alternatives to litigation, all falling under the broad title of alternative dispute resolution. The most well-known is mediation, and there are similarities between the two procedures. Both aim to provide a faster, less costly method of resolving a dispute without resorting to the courts. In both, the parties present their cases to a neutral third party in a completely confidential setting. However, there is a critical difference. In mediation, the mediator tries to help the parties find a common ground that they can each live with. More importantly, if the parties still can’t agree, they can walk away without reaching any settlement and go on to litigate their issues through the courts.

There are also some situations that are not well-served by arbitration. “Arbitrators are wonderful at dealing with fact-based cases, where the law is clear,” says James Samson, a partner at Samson, Fink & Dubow, who points to disputes over alterations, pets, carpeting, or noise. “We all know you’re not supposed to disturb your neighbor. Now the question is: did you? That’s a fact question.” He feels that arbitrators are good with cases that need creative solutions instead of precedent-based approaches and legal wrangling. If the corporation needs to pursue the collection of unpaid maintenance, however, or apply for an urgent injunction to control a dangerous situation in the building, the proper forum is court.

If you do decide to require arbitration in your building, you will need to amend your proprietary lease, specifying in what circumstances arbitration will be used. Typically in co-ops, holders of at least two-thirds of the total shares of the corporation have to approve such amendments, and this can be a major stumbling block. Rick Azar, principal at Azar Associates, a company that handles landmarking issues for co-ops and condos, notes that using arbitration could “make life for co-ops a whole lot easier or save a whole lot of money – if money was the issue. But, for many shareholders, arbitration is the last thing they’re going to want to go to, because they have a point to make.” And very often the money to pursue it. Sometimes, it takes a bad experience with costly, time-consuming, and traumatic litigation before shareholders are receptive to alternatives.

In the end, having an arbitration clause may mean never having to say you’re sorry. “I don’t think, in all the years I’ve been recommending an arbitration provision, I have ever had to actually have an arbitration between two shareholders,” says attorney Stuart Saft, a partner in Wolf Haldenstein Adler Freeman & Herz. “I think the reason is that, without the [arbitration] provision, the board’s hands are really tied as to how to handle these quality-of-life issues. But, with the provision, all the board has to do is say, ‘Okay, two shareholders, go to arbitration.’ Once they’re forced to deal with the issues, they’d rather deal with them on their own. It’s a way to eliminate the need for dispute resolution by having an effective method at your disposal.”