Arbitration Pros and Cons and Do’s and Dont’s

When considering whether arbitration may be the best option for your claim, it is incredibly important to consider the arbitration pros and cons.  While arbitration has many benefits that make choosing arbitration the best option in a variety of cases, there are occasionally disadvantages that may make parties consider other options for dispute resolution.  This article will explore the advantages that arbitration provides when it is used to resolve legal disputes. After that, this article will also evaluate the disadvantages that resolving a dispute through arbitration and end with a discussion on some of the most important considerations for choosing whether or not arbitration is the best choice for a dispute.  However, before any of this, this article will explain the basics of arbitration and alternative dispute resolution to help all parties decide if they are willing to consider arbitration.

Defining Arbitration

Arbitration is the process of resolving disputes through an arbitrator or an arbitral tribunal.  Of the alternative dispute resolution options, arbitration is the most similar to traditional litigation in that it typically ends in a binding arbitration award that the parties are required to comply with. However, arbitration is significantly distinct from litigation, as later discussion will show because it is a voluntary process that allows the parties to resolve a dispute in an efficient and confidential matter.  The arbitration may a party’s first choice, or it may be a final destination in an alternative dispute resolution agreement that starts with mediation and progresses to arbitration if the dispute is not settled.  However a party may find themselves in arbitration, it usually involves the same basic elements.

  • Agreement: All arbitration begins with an agreement to arbitrate.  This can be a general agreement in a contract that any dispute arises from the contract will be submitted to mandatory arbitration.  It can also be dispute specific where the parties agree to submit a specific dispute to arbitration.  However, it must be an agreement between the parties and cannot be a unilateral arbitrator’s decision.
  • Arbitrator: An arbitrator is a person in charge of deciding the dispute.  This is usually a lawyer or judge who has training in resolving disputes.  The arbitrator is neutral and the parties can choose an arbitrator or a panel of arbitrators.
  • Applicable Law: Depending on the case, the arbitrator may apply local, state, or federal laws to decide the case or the agreement in the contract may specify which laws the arbitrator is supposed to apply.
  • Award: At the end of the arbitration hearings, the arbitrator will issue an arbitration award.  This is similar to a decision from a court but is usually not able to be appealed.

Besides these elements, an arbitration will usually proceed like arbitration hearings or trials.  All parties will have a chance to present their case through their evidence to the arbitrator and the arbitrator will consider the evidence and issue an arbitration award.

Pros of Arbitration

Choosing to submit a dispute to arbitration can be incredibly beneficial for the parties and is used often by companies and other people because of these benefits.

  • Speed: Because a mandatory arbitration clause only requires the parties and the panel to be prepared, an arbitration will often be scheduled and decided before a trial would even begin. Arbitrators are usually not overrun by cases like the court system, and arbitrations usually follow a general timeline that allows them to be completed within six months.  This means that the parties will have a decision in their hands much faster than in litigation.
  • Costs: Arbitration is often cheaper than trial, especially a trial that is incredibly complicated and will be time-intensive.  Arbitrator’s fees are often less than all the court fees and costs as well. Parties involved are not required or recommended to have a lawyer either, which can save significant costs.
  • Evidence: The standard rules of evidence will not apply in an arbitration proceeding, so evidence that would not normally be admitted may be considered by the arbitrator.
  • Confidentiality: Arbitration proceedings are not open to the public and the parties can agree to keep everything confidential, ensuring that anything embarrassing or damaging to reputation will not be released.
  • Finality: Arbitration awards have very little room for appeal, and even if they may be reviewed, the grounds for setting aside an award are specific and limited, so there is little chance of a case lasting a long time to work through the appeals process.
  • Arbitrator: The parties in arbitration can choose their arbitrator, a luxury that is not allowed in litigation.  This also allows the parties to pick an arbitrator that is knowledgeable in the subject matter, making the process of explaining the dispute easier for the parties.
  • Collaborative: Because the parties can participate in the decision process and are even encouraged to provide ideas for a decision, the process can become less hostile and more conciliatory.  There is less room for the parties to compete and more encouragement to come up with creative solutions that both parties can be happy with.

Cons of Arbitration

Arbitration is often an incredibly helpful tool.  But choosing to arbitrate means that a party gives up certain constitutional rights to a trial, which makes it a big decision.  The choice must be informed, so it is important to consider the cons of arbitration as well.

  • Speed: Speed can be both a pro and a con.  While resolving a dispute faster is usually a good thing, there are cases where litigation could grant motions and preliminary matters to be settled for trial, allowing the parties to streamline their case and narrow the issues to the complicated and specific points of law.  These types of decisions are not usually available in arbitration clauses.
  • Costs: Many parties elect to be represented by an attorney, which can eliminate much of the cost-saving factors.  Certain arbitrators will often also have large fees that increase with the amount of the claim.  This can make a party pay a lot of money if they must pay an award and the arbitration fees.
  • Evidence: On the flip side of evidence, because the rules of evidence do not apply, the other party may be able to submit evidence toward their claim that would otherwise be inadmissible.
  • Finality: Finality can be a big hindrance if a case is decided against a party.  The party does not have a chance to appeal, even if the arbitrator makes an award that seems to be an abuse of discretion or a mistake.
  • Expertise: While the parties may choose an arbitrator for their expertise, an arbitrator may come into a dispute with a bias toward one side based on their expertise and experience before arbitrating.  This can be overcome, but it will likely put a lot of pressure on the party that needs to overcome the bias.
  • Experience: Some companies and individuals participate in arbitration often, giving them a head start in another arbitration.  Additionally, resources may not balanced, giving one party an even greater advantage.

Considerations

Finally, when deciding whether to arbitrate a dispute, it is best to consider the following factors to evaluate whether arbitration or litigation will be the best option for the case to be decided based on what the parties need.

  • Need for interim relief: If there is a great need for interim relief or dismissal of certain claims before the case is heard, arbitration may not be the best avenue.  While these motions are sometimes allowed, it is rare in arbitration.  It is more accessible in litigation.  If a case needs an injunction or needs claims dismissed, litigation may be the best route.
  • Need for a lawyer. If a party is unable to present their case effectively on their own, or if one of the parties already has a lawyer, it may be worth evaluating if arbitration may save costs. In cases that will still move quickly, attorney’s fees may not be as high, but complicated cases may eliminate the savings that arbitration can bring.
  • Need for evidence to be admitted or excluded: If a party needs a certain piece of evidence admitted or excluded to best prove their case, it may be worth evaluating which forum would achieve the needed results.
  • Need for secrecy: If there is a great need for secrecy, arbitration may be best. However, if a party is trying to make a point or an example out of the other party for their action, it may be best to allow the case to be public through litigation.
  • Need for expertise: As noted above, the parties may choose an arbitrator that is experienced in the subject matter of the dispute, allowing them to understand the dispute at a deeper level.  For particularly complicated disputes with specific knowledge and subject matter, arbitration may provide an experienced decision-maker.
  • Need for balance: If there is a party with less bargaining power and resources, it may be best to not pressure that party into arbitration, as power imbalances can be amplified through arbitration.

Conclusion

Choosing to arbitrate a dispute or signing an arbitration agreement is a big decision that cannot be taken lightly.  It must be made with an understanding of the arbitration process and the pros and cons of arbitration.  Arbitration often saves the parties time and money and allows the parties more freedom in presenting their case.  However, arbitration is not a one-size-fits-all solution to a problem, and some cases should not be submitted to arbitration based on certain factors.  Making a decision that considers all of the ramifications allows a party to have a better understanding of their case and what it needs and to be confident in their decision—whether it be litigation or arbitration.

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