When drafted and implemented properly, arbitration can have significant advantages over litigation. It can be faster, less expensive, and confidential. The process can also offer more flexibility than litigation and be designed to fit the specific needs of the parties and their dispute. It’s no wonder that arbitration has become a popular dispute resolution mechanism over the past few decades. And, as civil courts continue to be overloaded due to crowded dockets, understaffing and pandemic-related delays, parties may continue to turn to arbitration as their preferred forum to resolve their legal disputes. But is arbitration right for you and your business, or should you consider litigation? This article highlights some of the more consequential advantages and disadvantages of arbitration and litigation. Carefully consider each before deciding which is best for you.
Decision timing. Arbitration is a creature of contract and requires both parties to agree to arbitrate their disputes. If the parties do not reach an agreement to arbitrate, litigation will be the default forum for the parties’ dispute. The decision whether to arbitrate or litigate frequently arises when parties first negotiate a contract, as opposed to after a dispute has arisen. If you choose to include an arbitration clause in your agreement to cover future disputes, make sure to draft it carefully to avoid enforcement issues. For example, use a format that is recognized in the jurisdictions of both parties, so the agreement and any future award are enforceable. Pre-dispute arbitration agreements usually are enforceable, although more recently, there has been some groundswell to outlaw pre-dispute arbitration agreements in certain employment contexts.
While it may be easier to determine whether arbitration is more beneficial after a dispute has arisen and its parameters clearly delineated, the other party may elect to litigate, especially if it perceives that delaying matters will be a strategic advantage.
Expediency. Depending on the complexity of the dispute, parties who arbitrate can frequently reach a resolution in twelve months or less. Moreover, additional fast-track procedures are available for smaller claims. Conversely, litigation typically takes more than twelve months, with disputes often taking years to be resolved in increasingly busy courthouses, a situation only exacerbated by the COVID-19 pandemic.
On the other hand, litigation may create opportunities for the presiding judge to make legal rulings prior to the trial, including summary judgments and other early dispositions, to dismiss or narrow the scope of the claims in the case. Whereas arbitrators typically have the authority to issue similar rulings prior to the final hearing, parties may not be as successful in obtaining those rulings from arbitrators. Furthermore, some parties may challenge the enforceability of an arbitration agreement in court, thus delaying the dispute resolution process at the very outset and nullifying the benefit of expediency.
Expense. Over the years, arbitration has been promoted as a less-cumbersome and less-expensive alternative to litigation since arbitrators and the parties can streamline the proceedings by limiting the scope of pre-hearing fact-gathering, the number of witnesses and evidence admitted to avoid unnecessary costs.
However, increasingly so, arbitration expenses can be on par with the price tag of litigation. Court filing fees are nominal, and judges are not paid directly by the parties for their service, whereas, depending on the type of dispute, arbitration can involve significant filing and arbitrators’ fees and case management expenses. For example, fees for commercial disputes are typically higher than those related to employment disputes because they are assessed based on the value of the claim. Furthermore, parties also have to cover hourly or daily arbitrator fees, which can quickly add up. In employment disputes, the employer can be expected to shoulder much more of the load for the case management fees and arbitrator costs. Therefore, if the predominant factor for selecting a dispute is the potential for a more economical forum, you should carefully consider whether your particular dispute truly will result in savings by resolving it through arbitration.
The decision-maker. The COVID-19 pandemic has exacerbated already overloaded dockets, limiting the time judges can spend resolving individual disputes. Arbitrators, on the other hand, typically have more time to properly consider and decide matters.
Additionally, parties can exert more influence over the selection process, including deciding how many arbitrators should resolve the dispute — be it a single arbitrator or a panel. Parties also can vet arbitrators based on their specific industry experience and client roster and agree that their arbitrator has to possess specific knowledge, experience, professional background or certifications relevant to the parties’ dispute. For more complex issues, this selection process can result in the parties appointing a highly qualified arbitrator with particular experience that is relevant to the dispute. Parties have virtually no input over the judge to whom a case is randomly assigned in court.
Beyond determining the composition of the arbitral panel, parties also can select the seat of the arbitration and the location of any hearings. This consideration is particularly important when parties originate from different jurisdictions or even different national legal systems, and they prefer to avoid resolving the dispute by the “home” courts of the other party, instead selecting an impartial, efficient and pro-arbitration legal system. For example, in international arbitration, it’s quite common for the chair of the tribunal to be from a country different from those of the parties.
Arbitrators also are considered to be more predictable than a jury of peers and less likely to be swayed by emotional appeals that are not substantiated by evidence. In contrast, arbitrators sometimes are perceived to be more inclined to split the proverbial baby and issue rulings that benefit or harm both parties relatively equally. Because rules of evidence and procedure have less force in arbitration, arbitrators are not only more likely to allow irrelevant witnesses or evidence; they also can refuse to accept procedural defenses that may terminate a dispute early.
Ruling finality and legal errors. Arbitration awards typically are final and binding and lack a customary right to appeal an unfavorable decision. While some arbitration agreements outright remove any right to appeal, the statutory bases to reverse an arbitration award are exceptionally narrow. As a rule, arbitrators are not bound by legal principles and are allowed to make rulings based on what they consider to be just and equitable. Additionally, arbitrators do not have to justify or detail the rationale for their decisions, which typically are not reviewed for legal errors. Errors in the interpretation or application of the law or facts generally are not permissible bases to upset an arbitration award. Because of these factors, arbitration decisions are less likely to be overturned, even if a party strongly believes the evidence does not support the outcome. This can make a party skittish when selecting arbitration. On the other hand, the general finality of the award may be a welcome result for a weary party that is tired of challenges and appeals.
Conversely, rulings in litigation tend to be better documented, and unfavorable or erroneous decisions can be appealed to a higher court. Some parties may value the finality of an arbitration award, whereas others place higher importance on the ability to seek recourse if a decision is viewed to be erroneous or unjust.
Confidentiality. While court proceedings and their case records are open to the public, arbitration proceedings enjoy a large degree of confidentiality, making it the preferred dispute resolution forum for many for that reason alone.
As with any mission-critical decision, one solution does not fit all scenarios. Arbitration and litigation have their advantages and disadvantages, so it is crucial to consider them carefully in the context of your specific dispute and your values. You should reach your decision by assessing which attribute is most important to you. Is it confidentiality? Or, do you want to retain the ability to appeal an erroneous ruling? It is always a good idea to consult an experienced attorney to walk you through all relevant determinants before selecting or agreeing to a particular dispute resolution mechanism.
About the author: Kellen Scott is a shareholder in Chamberlain Hrdlicka’s Labor and Employment and Litigation sections. He represents businesses before state and federal administrative agencies and in court and arbitration proceedings involving wage and hour, classification, and restrictive covenant issues. Scott also advises clients on a variety of pre-dispute issues. He can be reached at [email protected].