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Regulatory: Pros and cons of using arbitration for dispute resolution

There are many factors to consider when crafting a contract

Over the years there has been a movement to use arbitration as the preferred method of dispute resolution in contracts. Due to crowded courts, judges inexperienced in the relevant subject matter, lengthy trials and excessive jury awards, many lawyers assume arbitration is the preferred method of dispute resolution. Before automatically including an arbitration clause in a contract, however, it is advisable to evaluate whether arbitration is the really the best method of dispute resolution. This post provides an overview of some of the more noteworthy advantages and disadvantages of requiring arbitration to resolve disputes arising under an agreement.

Arbitration Advantages

  • Tailored rules: Arbitration rules can be tailored to the types of disputes that are likely to occur under the contract. For example, the parties can agree to limit damages and specify procedural rules for the discovery process and the format of the arbitration, which may result in an expedited presentation of the case.
  • Arbitrators knowledgeable in the subject matter: A well-crafted arbitration provision will also require that the arbitrators have some background in the relevant industry (e.g., retired industry executives). This helps ensure that the arbitrators understand the underlying issues and are familiar with standard industry customs and practices. This is particularly helpful when a contract involves complex or unique issues. Use of arbitrators experienced in the subject matter of the contract also improves the likelihood they will focus on the right outcome, rather than procedural or technical formalities and should decrease the likelihood for an excessive award.
  • Expedient, convenient, less-expensive forum: Historically, arbitrations are scheduled, conducted and concluded more quickly and are less expensive than a court trial.
  • Confidential decisions: The parties can decide in advance if they want to have the decision of the arbitrators be confidential and can even provide that the decision will not be made in writing.

Arbitration Disadvantages

  • Not always more expedient or cost effective than court proceedings: Although the informal rules and procedures in arbitration may result in an expedited and cost-effective process, the informality can actually lead to a more inefficient process. In recent years, arbitration proceedings have become more formal and even adopted some of the procedural formalities of court litigation which can cause increased legal fees. There also are other costs associated with an arbitration that should also be taken into account, including arbitrator fees and the cost of the venue.
  • Arbitrations can be unpredictable: While the relaxed procedural and technical aspects of arbitration can lead to a more streamlined process, it can also lead to delays and unpredictable results. Unlike a court trial, the arbitrators may be reluctant to reprimand improper behavior of a party, which makes it difficult to compel the parties to adhere to arbitration rules or punish unethical behavior. Arbitration decisions can be as unpredictable as decisions of judges and juries.
  • Limitations of arbitrations: Temporary injunctions, wage garnishments, property attachments, motions to dismiss, summary judgments and other interlocutory remedies and decisions are not typically available in arbitration. It is also difficult to appeal or vacate an arbitration decision where a party feels the arbitrator relied on facts unsupported by evidence or misapplied the law. In addition, collateral estoppel and res judicata are not typically available in arbitration because it is difficult to prove what was litigated or ruled upon with informal pleadings, decisions and records.

It would of course be optimal for a party to decide whether to arbitrate when a dispute arises. After the dispute has arisen, however, a party can not unilaterally compel arbitration absent a requirement to arbitrate.

Therefore, the parties to the contract must carefully evaluate whether arbitration is the preferred dispute resolutions mechanism and, if so, carefully craft the arbitration provision based on the relationship of the parties, subject matter and the types of disputes that are likely to arise.

Contributing Author

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Julie Mahaney

Julie L. Mahaney is an associate in the Insurance and Reinsurance Department in the Hartford, Conn. office of Edwards Wildman Palmer LLP.  She focuses her...

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