Arbitration is an alternative to court proceedings for legal disputes between parties. The parties to a contract agree to arbitration beforehand in the event of a dispute and select a private arbitrator or arbitration provider to resolve a dispute if one arises.
Many are familiar with court litigation. The process can be lengthy, time-consuming and expensive. Arbitration desires to resolve disputes quicker, more efficiently and with potentially less cost. It is less formal but binding litigation that has certain benefits and disadvantages.
Let’s delve deeper and look at some of the major advantages and disadvantages.
Informal Procedure – An arbitrator conducts hearings in an informal office setting. Although parties can present evidence, witnesses, and hear testimony, the procedures are less rigorous and formal than court proceedings.
Speed & Finality – Court litigation can linger for years. Private Arbitration is much quicker and can be resolved in months or sooner. Simplified rules and procedures tend to result in speedier outcomes. With some limited exceptions, an arbitrator’s award is final and is not appealable. The parties have a high degree of finality.
Confidentiality – Arbitration is not open to the public as are court proceedings. This may be a significant benefit, especially for professional services disputes and/or where privacy is of outmost importance.
Cost – The simplification of arbitration procedures and rules provides for potential cost savings over traditional court litigation. Less time spent in pre-arbitration discovery and hearings usually results in less attorney’s fees and costs. The parties will usually split the fees of arbitration as well. However, see the caveat to this below.
Rules and Procedures Less Certain – Though the goal is to facilitate a quick decision on the merits, the rules, process, and procedures are often less clear than court litigation where well established rules and procedures exist. Limited Discovery in the arbitration setting may also hamper a party’s ability to get evidence.
Cost – though we mentioned cost under “advantages,” the costs of arbitration may also not make sense in minor disputes or where an arbitrators daily/hourly fee may be high. An Arbitrator will want the deposit of fees in advance and that can be a significant outlay besides attorney’s fees.
No Appeals – Although having finality is important for many clients, they should understand that if dissatisfied with the outcome, there is no ability to appeal the arbitrator’s decision.
Arbitration is a valuable alternative to traditional litigation. However, clients should contemplate and get legal advice about their business, and the type of disputes they are likely to encounter. Understanding the benefits and drawbacks of arbitration before updating client contracts to include arbitration provisions is key and well worth the time and effort.