Arbitration: an Alternative to Litigation

Spring 2016 Article

Arbitration: an Alternative to Litigation

When a party is entering into a contract with a customer, partner or employee, it should give consideration to what will happen if a dispute occurs between the parties.  Given the potentially high cost of litigation, parties may want to consider deciding in advance to commit themselves to resolve any dispute through means other than litigation.  One option that should be considered when drafting any contract is whether to include an agreement between the parties to submit any dispute to arbitration.

1.         What is arbitration?

Arbitration is an alternative to litigation in which the parties to a dispute agree to have a private individual or panel of private individuals act as the judge and resolve the dispute, instead of having the matter resolved by a jury or government official in a court or administrative proceeding.   Usually, the arbitration process is agreed to in a contractual arbitration provision in advance of the dispute between the parties, though in some rare instances a court can order a party to “judicial arbitration”.

Typically, while designed to provide each party an opportunity to present their case in a fair proceeding, the process permits more limited “discovery” – the right to request information and depose the other parties - to the parties.  In addition, as the arbitrators are paid for their services by the parties and not required to handle each matter that comes before them as a court is required to do, the matter can be scheduled for an arbitration proceeding much more quickly than a party would be able to proceed to trial in a court of law.

As arbitrations typically occur because the parties have contractually agreed to arbitrate the dispute, the parties can agree to “waive” their rights to arbitrate the dispute and proceed in a court instead.  However, this may only occur if both parties agree to do so.  If a party is subject to an arbitration agreement and attempts to proceed in court instead, its counterparty can ask the court to dismiss the court proceeding and compel the parties to arbitration instead.

Depending upon the agreement between the parties, arbitrations may be either “binding” or “non-binding”.  Generally, a non-binding agreement is of little value, as the parties will be forced to proceed through the arbitration process, but will not be bound by the result.  However, such a provision can serve a purpose in the context of an ongoing business relationship by providing a quick resolution by an independent party.

In contrast, binding arbitration has the same effect as a judgment in a court. Importantly, most states and the Federal Arbitration Act provide that arbitration awards may be confirmed in a court and then enforced in the same manner as a judgment.  Additionally, in contrast to judgments in a court, binding arbitration awards are not subject to appeal to a higher court, except in very limited cases.

2.         Advantages and Disadvantages of Arbitration

Arbitration has several advantages over litigation.  Some advantages are:

1. Predictability:  arbitration allows the parties to control the time, place and manner of resolution of any disputes prior to the dispute occurring.  By doing this, the parties have more predictably about the consequences should they need to resort to a third party to resolve their dispute.  In addition, as the parties and the arbitrator agree to the time and place of the proceedings, the parties can be assured that they need only make party representatives and witnesses available at a particular time and place, and do not need to be concerned that individuals will appear for a trial, only to have it delayed and rescheduled for another time (as often occurs in court trials).

2. Speed:  Arbitration typically moves more quickly than litigation.  The manner and pace of the proceedings are set by the arbitrator with the input of the parties.  Further, the proceedings themselves are only subject to the availability of the parties and the arbitrators, so the parties are not subject to the common delays that occur in courts where parties often appear for trial only to be informed that a courtroom and judge are not available.

3. Cost:  While not always, arbitration, because of the limits on discovery, is typically less expensive than litigation.  As the arbitrator has authority to limit discovery in the case so that it is proportionate to the amount in controversy, the parties cannot use the cost of discovery and motions as a tool to force the other party to relent.

4. Expertise:  For some complex or highly technical disputes, the parties may need a “judge” who has a particular expertise in order for an informed decision to result.  The assignment of judges does not provide for any input of the parties in nearly every instance, so the parties cannot ensure that the decision will be made by someone with such expertise.  However, the parties can agree in an arbitration agreement that the arbitrator will have particular expertise and experience in a technical field.

5. Confidentiality:  Litigation proceedings are public proceedings.  Not only may members of the public attend court proceedings, but the filings are also subject to public disclosure and there is a strong public policy in favor of disclosing all records.  As such, only in rare instances may the parties keep filings private and confidential, even when the parties are in agreement.

In contrast, as arbitration is a private, contractual proceeding, the records of the proceedings and filings are not a public record and may not be disclosed to the public.  As such, the parties can keep their dispute and any of the evidence private and avoid any consequences of disclosure.

6. Finality:  As arbitration awards are enforceable and not subject to appeal in most instances, once an arbitration is resolved the matter is resolve finally and cannot be dragged out for years through appeals of the judgment.

However, arbitration also has some disadvantages:

1. Waiver of rights: Arbitration is not only a contractual dispute resolution procedure, it is also a contractual waiver of certain constitutional rights, most notably a trial by jury and a right to appeal an adverse verdict.  While often this is preferable to a party, the party must waive these rights at the inception of the matter and has no recourse to assert those rights later.

2. Cost:  While in many instances, arbitration is more cost-effective, for certain matters it can be much more expensive.  For example, in a matter involving a collection of a debt, the creditor could find itself having to pay significant costs to an arbitrator for a matter that could be resolved much more inexpensively in court.

3.         How to ensure that arbitration is an option?

In order to ensure that arbitration is an option, an arbitration clause should be part of the contract negotiations at the inception of the relationship.   While most arbitration agreements are presumptively enforceable under the Federal Arbitration Act and state law, care must be taken to make certain that any arbitration agreement is drafted carefully.  In particular, in order to have an arbitration agreement enforceable in the United States, it must require that the arbitration occur in the U.S., otherwise a court does not have authority to order a party to arbitration.  In addition, in some particular cases, like employment agreements, different states place procedural requirements on the clauses in order to have them enforced.

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Requests for information or insights on the issue discussed in this article may be addressed to michael.purcell@vallalaw.com.  This article is for information purposes only and does not constitute legal advice. The information contained herein may be outdated or incomplete, and shall in no way be taken as an indication of future results. The transmission of this article is not intended to create, nor does its receipt constitute, an attorney-client relationship between preparer and reader. You should not act on the information contained in this article without first seeking the advice of an attorney.