Conventional wisdom holds that arbitration is a more preferable mechanism for dispute resolution than full-blown litigation in the court system. Knowing nothing else about the particulars of a particular dispute, if arbitration is available as an alternative to state or federal litigation, we generally advise our clients to arbitrate.
However, that does not mean that arbitration is preferable to traditional litigation in all respects, or that arbitration is always well-suited to resolve a particular dispute. We often are asked by clients to evaluate the benefits of arbitration versus litigation. The purpose of this brief article is to set forth the general framework within which we address that question.
Pros of Arbitration
The primary benefits of arbitration are well-documented:
- Lower Cost: On average, seeing a case through arbitration costs less to the client than does seeing a case through litigation. The lower costs relate closely to more-streamlined discovery and the shorter length of the entire procedure.
- Controlled & Compacted Schedule: Arbitration offers a high degree of predictability in the scheduling of deadlines, hearings, and awards. Most arbitrations resolve within one year of initiation.
- Knowledgeable Arbitrator: Arbitration parties typically select an arbitrator from a pool of subject-matter experts. The American Arbitration Association maintains a listing of local arbitrators with specialty designations in a variety of fields (e.g., commercial construction). An arbitrator with industry experience requires less education on technical aspects of the case.
- Privacy: Arbitration proceedings are not on the public record. This is a benefit where the subject matter of the arbitration is commercially sensitive. Parties can agree prior to the arbitration to effectively “seal” any evidence and perhaps even the outcome of the arbitration.
- Finality: Arbitration parties have no rights to appeal the substance of the arbitrator’s decision. This means that arbitration awards are generally final, therefore a party can plan accordingly once the arbitrator issues its decision.
Cons & Quirks of Arbitration
However, the negatives of arbitration are less discussed:
- Multi-Party Difficulties: To enter into arbitration, parties either voluntarily agree to so enter, or are compelled by a court to submit to arbitration based upon a prior and valid agreement to arbitrate. This makes complex multi-party disputes tough to arbitrate. For example, CGL insurers on construction projects usually cannot be compelled to participate as a party in a construction defect arbitration between a claimant and the respondent insured. The more parties a case involves, the less likely that arbitration will be a feasible option.
- Higher Filing Fees: Clients are often surprised at the up-front filing fees required by arbitration service providers such as the American Arbitration Association (“AAA”). Those fees depend upon the claim amount. For example, an AAA claim of $150,000 requires payment of $3,000 in purely administrative fees. The amount of the fees increase along with the claim amount, and for larger claims, can approach $15,000. Also, these fees are in addition to arbitrator compensation, which must be covered by the parties and usually resembles typical hourly attorney billing.
- Summary Judgment Unlikely: In traditional litigation, the summary judgment procedure is an effective tool to resolve certain claims before trial. For example, if the parties agreed on the relevant facts but disagreed on the interpretation of their contract, such an issue would be ideal for early resolution in court via summary judgment. However, arbitrators rarely grant summary judgment motions, so this tool is not effectively available in arbitration. Several experienced arbitrators have commented to us that, due to the finality of arbitration and lack of an appeal procedure, they are extremely hesitant to dispose of any part of a case prior to the hearing itself.
- Adverse Ruling Is Final: The finality of arbitration certainly works against a party facing an adverse decision by the arbitrator. State and federal courts offer substantive appeal procedures which involve close scrutiny over the lower court’s decision; no such mechanism is available in arbitration. In almost all cases, the loser is stuck with the arbitrator’s initial decision.
- Limited Subpoena Power: Parties often require testimony or information from a party who is not named in the proceeding. The subpoena process is available in arbitration, but can be limited in scope and time-consuming to properly enforce.
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It is true that arbitration is generally more preferable to court litigation as a dispute resolution mechanism. However, in cases in which a party has a choice over whether to arbitrate or litigate a particular dispute, the party should pay careful attention to the nature of the dispute in light of the pros, cons and quirks of the arbitration proceeding.