It seems like every contract, service agreement, or website terms of service has a mandatory arbitration clause in it. Why is that? There are compelling reasons to arbitrate disputes, but arbitration also has its drawbacks.
Arbitration is private; whereas, generally documents in court cases are public records.
So, if keeping a dispute out of the public eye is important, arbitration is preferable. In most cases, arbitration is faster. Arbitration can be accomplished in a matter of months. In smaller cases, parties can ask for fast track arbitration which is even faster. Fast track arbitration can be accomplished in a month or two.
Litigation of smaller cases will generally take six months or more. Litigation of complex cases can take years. Arbitration is informal. Because arbitration is done by agreement, it is flexible.
The rules of evidence don’t apply, so parties can either loosen or dispense with the need for testimony necessary in court that makes documents and such admissible. The investigation phase of a lawsuit is called discovery.
Discovery in arbitration is more of an informal exchange of information rather than a structured process involving asking, objecting, and getting court rulings on information requests. Arbitrators can, but do not have to, strictly follow some statutes. For example, an arbitrator can relax some of the “gotcha” procedural laws that litigants find to be unfair such as the time limits for filing suit. Arbitration is final. It is very difficult to appeal an arbitration award.
What are the drawbacks to arbitration?
Because the arbitrator does not have to follow laws strictly, statutory claims and defenses that may be a slam dunk in litigation may not be followed by the arbitrator. It is very, very difficult to overturn or appeal an arbitration award. Litigants have a right to have a higher court review lower court rulings.
Because the rules of discovery and rules of evidence do not apply to arbitration, parties run the risk of not getting all of the information and evidence relevant to the case. The arbitrator may base an arbitration award on evidence that is not admissible in court. Courts and juries cannot consider inadmissible evidence.
There is no jury right in arbitration. The arbitrator is both judge and jury. If the losing party doesn’t pay the award, it will take longer to make the award collectible. If a court judgment is not appealed, it becomes final and collectible in 30 days. After arbitration, the winner must file the arbitration award in court, and the court will confirm the award making it collectible. However, the loser has 90 days to dispute the award in court.
Which is more expensive?
That depends. The filing fees for arbitration are higher, but overall costs of arbitration can be lower because arbitration takes less time and because preparing the case for arbitration is less expensive.
Mediation is an alternative.
Mediation is a means of dispute resolution that is less expensive than arbitration or litigation. Mediation is attractive because the parties agree on a resolution. If mediation is not successful, then the parties may resort to arbitration or litigation.
Many businesses prefer arbitration because it provides a private forum for resolution of disputes, and arbitration can be faster and less expensive than litigation.
In business disputes among licensed professionals such as doctors or lawyers, the privacy afforded by arbitration is preferable to public court proceedings that may expose the dispute to media coverage.
In reality, inserting arbitration clauses into business contracts has become a knee jerk almost rising to the level of boilerplate. Before inserting an arbitration clause into a contract, consider the pros and cons in light of the contract and the parties’ relationship. Rather than inserting an arbitration clause into every contract, consider requiring mediation prior to arbitration or litigation as an even less expensive means of resolving disputes.