Advantages and Disadvantages of Arbitration

By Amanda Stephens

Alternative Dispute Resolutions (“ADR”), such as arbitration or mediation, have become popular methods for settling disputes among parties today. Entities and individuals are more frequently choosing to forego the process of the traditional court system for the resolution of disputes by entering into agreements containing arbitration provisions. Arbitration is a method of resolving disputes outside of court whereby an arbitrator employed by the parties will listen to the arguments of the parties, review the evidence and issue a decision that is generally final and binding on the parties. Considering the prevalence of arbitration clauses in contracts today, it is imperative that parties consider the advantages and disadvantages of arbitration proceedings and make an informed decision before entering into such an agreement.

Advantages

Cost. Generally, arbitration proceedings will result in quicker dispute resolution than in the court system. This, in turn, results in lower overall costs. In addition, only limited discovery is allowed in arbitration, which greatly helps to reduce the costs of reaching a resolution.

Informality. Arbitration proceedings are far less formal than a trial. Unlike trials, which must be held in a courtroom, parties can agree to have arbitrations in any convenient setting of their choosing. Also, the rules of procedure and evidence are greatly relaxed and simplified, making the overall process much less formal than a typical trial and giving the parties more control.
 

Privacy. Arbitration proceedings are generally held in private, and parties can agree to keep the final resolution confidential. This is especially appealing if the subject matter of the dispute involves private or embarrassing information.

Control. Parties have the ability to maintain greater control over the dispute resolution process through arbitration. The arbitrator is selected by the parties. Unlike in a trial, where the judge or jury may know very little about the subject matter of the dispute, the parties to arbitration have the ability to select an arbitrator with expertise in a certain area, which may lend to a more equitable and informed decision. Additionally, the parties can generally select and stipulate as to the legal and procedural rules that will govern the process.
 

Disadvantages


Inability to Appeal. As a general and practical rule, the arbitrator’s decision cannot be appealed. Only in certain limited situations, such as when the arbitrator exceeded his or her authority or upon proof of corruption, fraud or undue influence, will an arbitrator’s decision be reviewed by a district court. This can be especially troubling given that an arbitrator generally has more discretionary and decision-making power than a judge or jury. Therefore, the binding nature of the decision and the general lack of ability to seek recourse from an incorrect decision make the consequences of the arbitration more profound.

Lack of Formal Discovery. Although the lack of a full fledge formal discovery process in arbitration proceedings may result in decreased costs, it can also mean that the parties (or one party in particular) may not have all of the information necessary to fully evaluate the case. Therefore, a party may present its case to an arbitrator without being privy to all of the pertinent facts that could have been revealed had more formal discovery, such as interrogatories, requests for production and depositions, been conducted.

Discretion of the Arbitrator. An arbitrator may make his or her decision without issuing any written opinion or explanatory statement. Furthermore, since arbitrations are private and so infrequently reviewed by courts, the lack of transparency in the decision-making process may leave room for bias in arbitration proceedings.

Rising Costs. Although arbitrations are typically going to be less expensive than litigation, the cost of arbitration is on the rise, making arbitration often more expensive than other ADR proceedings.
 

Arbitration, along with other methods of ADR, can provide an attractive alternative to the traditional legal system when resolving disagreements. However, the pros and cons of arbitration, the particular transaction and the needs of the parties should all be carefully considered before agreeing to arbitrate a dispute. Furthermore, since the arbitrator is greatly governed and guided by what the parties state in their ADR provision, any issues or concerns with the process can largely be addressed through a well-drafted agreement to ensure a more fair and efficient resolution for all parties involved.