The conventional wisdom among many business owners is that arbitration is more efficient than litigation, and that mandatory arbitration clauses should be included wherever possible. Like most generalizations, however, the truth is not so simple. Here are several factors you should consider when deciding whether to incorporate a mandatory arbitration clause into that contract you are drafting.
1. Time
Speed may be the single greatest advantage to arbitration over litigation. Stories of crowded court dockets are legion, and it is not unusual for a dispute to languish in court for years. Although arbitrations can be slowed where they involve multiple parties or cross-border disputes, more often than not they will be resolved more quickly than a dispute filed in court. That hastens finality and it enables the litigants to spend less time litigating, and more time running their businesses.
2. Cost
Most lawyers now recognize that arbitration is not necessarily less expensive than litigation; instead, the opposite may be true. Not only is the cost of instituting arbitration more expensive than filing a complaint in court, the parties also must pay the fees of the private arbitration panel, which can include as many as three high-priced lawyers or retired judges. Thus, in a low-dollar dispute, arbitration may be financially impractical. That being said, the real cost savings in arbitration lies in the likelihood that an arbitrator will be less inclined than a judge to entertain extensive discovery and motions practice, both of which frequently drive the fees and costs of litigation. Thus, when there is a concern that the cost of discovery might outstrip the value of the case, arbitration may be a better alternative.
3. Ongoing relationships
By design, the arbitration process tends to be less formal and more collegial than traditional courtroom litigation, which tends to be more adversarial in nature. This may not matter when litigants have no continuing relationship, but when there is an ongoing business relationship that the parties may wish to preserve, arbitration may be more conducive to success.
4. Confidentiality
One of the most compelling advantages of arbitration is the ability to keep the dispute—and its resolution—under wraps. In arbitration, there is no public hearing and, thus, no public record. The parties may agree as part of their pre-dispute arbitration clause that they will maintain such disputes in confidence. This can provide terrific value to a company that would prefer to avoid publicity, or a dispute that is likely to involve commercially sensitive matters.
If you’re still leaning toward arbitration, consider one final question: On what basis do you want your dispute to be decided? In a courtroom, the judge is constrained by the law as it is reflected in statutes and prior decisions, and the trial will be governed by the rules of evidence.
In contrast, arbitrators are not constrained by statutes or case law, nor are the proceedings before them governed by the rules of evidence; instead, they have much greater flexibility to consider whatever evidence they want (including evidence that would be excluded in a trial) and then reach a decision that they perceive to be equitable, even if it is not precisely consistent with the law. While this may work to your advantage, it may also generate substantial uncertainty about the process, and most business owners would prefer to avoid uncertainty.
On a related note, arbitration avoids the risk of a “run-away jury” and it minimizes exposure to punitive damages.
6. Expertise
Consider whether technical competence is likely to be important to understanding the issues in dispute. If you proceed in court, it is conceivable that the judge will have no substantive expertise in your industry, and that may limit the court’s ability to evaluate the evidence. In arbitration, however, you will have the ability to select an arbitrator with subject-matter expertise. While that may not matter in most cases, it is not difficult to appreciate why many construction disputes are resolved through arbitration instead of litigation.
7. Appeal
The right to appeal the decision of the trial court should not be overlooked. Although trial court verdicts are not casually reversed, judges do make mistakes and the ability to request a “second look” by an appellate panel is an important procedural safeguard. In arbitration, however, the arbitrator’s decision generally is not subject to appeal.
The foregoing is not an exhaustive list of factors to consider, and there is no one-size-fits-all answer to the question. This should, however, get you started asking (and answering) the right questions.
