The past few years have seen significant interest in the use of alternatives to traditional litigation in settling legal disputes. These different methods, often called “alternative dispute resolution” or ADR, include mediation and arbitration. Each has advantages and disadvantages. Although business owners can never eliminate the possibility of disputes, they can mitigate their risks and costs by selecting the best solutions to minimize the impact on their time and business.
The purpose of this article is to describe the benefits and drawbacks of pursuing arbitration as a method of resolving business disputes. Once you have a better understanding of the pros and cons of arbitration you can evaluate whether to agree to it in your contracting. I do not address mandatory arbitration between an employer and employee or in consumer contracts, both of which are subject to certain statutory limitations.
Both arbitration and mediation have the advantage of being private, rather than public, as is the case with litigation and court trials. However, there are significant differences between these two ADR processes. While mediation is a process in which the parties use a neutral third party to facilitate a voluntary settlement, arbitration is usually a binding form of dispute resolution in which the parties agree to abide by the decision of a neutral third party whom they have selected for the purpose.
When parties agree to submit to arbitration, they often choose to go through an organization such as the American Arbitration Association, a nonprofit organization that provides ADR services and has created a body of arbitration rules and procedures for parties and arbitrators to follow. There are also international arbitration bodies available when doing business with companies and persons outside the U.S. Sophisticated foreign parties will often insist on using one of these international bodies rather than the American Arbitration Association or litigation in U.S. courts.
Benefits of Arbitration
Arbitration is in some ways like a streamlined version of a court case, but without a judge or jury. Rather than a judge, you have a neutral third party, consisting of one or more arbitrators. Both parties will usually have to choose the arbitrator(s) together.
One of the most significant advantages of arbitration is how quickly it can resolve your issue. Litigation may take years, whereas arbitration can be initiated and finalized in months. A study by the economics consultancy Micronomics found that on average, an arbitration case took only half as long to conclude as a court case (11 months vs. 24 months). The disparity was even wider if a party appeals the court decision. The shorter duration of an arbitration case can also limit costs, compared to litigation.
Even though parties in an arbitration may choose to have an attorney represent them, the total costs of arbitration are usually lower than those associated with a court trial. Because you are not in court, the rules and procedures regarding discovery, admitting evidence, and depositions, which drive up the cost of litigation, do not apply, and there is usually far less discovery during an arbitration.
As a business owner, you may also want to avoid the public nature of a trial. With arbitration, the initial dispute, hearings, and the arbitrator’s decision remain confidential. And unlike a trial, the losing party usually cannot appeal the arbitrator’s decision, which is an advantage for the winner. (more on the downside of this below).
Drawbacks of Arbitration
As noted just above, the main disadvantage of arbitration is the inability to appeal an adverse decision. During arbitration, everything rests on a single arbitrator’s (or a panel of arbitrators’) decision. It is essential to remember that while a judge is bound by the law, an arbitrator may work towards a fair solution rather than a strictly legal one. If a party would be better served by a strictly legal decision rather than an equitable one, litigation may make more sense. An arbitrator’s decision and award of damages can be unpredictable (I say this from actual experience in an arbitration I once handled for my employer).
Previously, I highlighted that the rules of evidence applicable to court proceedings do not normally apply in arbitration. This lack of procedural steps can sometimes work to the disadvantage of a party that needs to conduct a lot of discovery or depose a lot of witnesses.
An arbitrator may consider evidence that would be inadmissible in a jury trial, which the parties must recognize. The decision they make based on this evidence will likely never be reviewed by a judge. If you enter into a form of binding arbitration, you lose your ability to file an appeal.
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Spitz Legal Counsel, LLC, has extensive experience helping companies navigate legal issues. This includes drafting a variety of agreements and developing appropriate and sound employee strategies. Contact us today to schedule your free initial consultation.