Putting the Baby to Rest: Dispelling a Common Arbitration Myth – Vol. 26 No. 1

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Author: Carter Greenbaum*

Published: July 2015

Description: The falsely held belief that arbitrators “split the baby” and deliver awards that represent a compromise between claimants and respondents in arbitration has persisted within the legal community for decades, despite a lack of empirical evidence. This research presents an empirical analysis related to this assumption as it impacts consumer and B2B commercial arbitration. It finds a dearth of actual evidence of the incidence of compromise awards in commercial arbitrations. Using a random sample of more than 400 confidential commercial arbitration awards, this article concludes that the incidence of compromise awards in commercial arbitration is insignificant.

Moreover, this research challenges many other assumptions about arbitration generally, and about arbitrators splitting claims specifically. For example, some practitioners believe former judge-arbitrators are less likely to issue compromise awards than attorney-arbitrators. Not so. While the dataset does not support the hypothesis that compromise awards are prevalent, it does indicate that compromise decisions are more likely to be issued when two companies sue each other, rather than when one litigant is a consumer. Yet, even in B2B arbitrations, the incidence of claim splitting is minimal at best.

In 2011, RAND undertook a comprehensive study of how in-house counsel perceive binding arbitration to understand why “corporate counsel do not use arbitration more frequently.” An analysis of contracts from 21 of the largest public corporations found that 77% of their consumer contracts included mandatory arbitration, while only 6% of business-to-business contracts did. The RAND study partially blamed the diminished use of abitration in B2B contracts on the perception that arbitrators “split the baby.” Seventy percent of respondents agreed that arbitrators “split the baby” despite empirical evidence from the AAA that they do not. The report concluded, “[F]urther study of arbitration awards (which is difficult at best) would be required to determine if arbitrators are splitting awards.” If corporate counsel’s fear regarding the propensity of arbitrators to split claims could be assuaged, they would use arbitration more in their B2B contracts. At stake in this analysis is a multi-billion dollar industry of private dispute resolution.

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*J.D. candidate, Yale Law School 2016 and a Howard Holtzmann Fellow in International Arbitration and Mediation Studies.