Disadvantages of Arbitration: A Closer Look

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Disadvantages of Arbitration

Arbitration proceedings are often touted as a fantastic alternative to resolving legal disputes; however, there are disadvantages to arbitration that can make it the wrong choice for a dispute for various reasons. Understanding how arbitration may not fit a situation or case can help parties make the best decision regarding the dispute resolution mechanisms. 

It can also help parties attempt arbitration as a dispute resolution method to avoid any disadvantages that may crop up or minimize their results. Deciding whether to use arbitration will often be a balancing test between the process’s disadvantages and the benefits that can be achieved through it. Every alternative dispute resolution should be approached with careful consideration. 

This article will examine why arbitration may not be the best option for a dispute and identify critical areas to watch out for pitfalls. It will help readers identify and address the disadvantages of arbitration.

The Arbitration Process 

Before discussing the disadvantages of arbitration, it is essential to understand the process of arbitration proceedings. Knowing how it works can help participants understand where issues may arise and how to avoid them at each step. Arbitration is a dispute resolution method in which the parties present their case to a neutral panel of arbitrators who issue a final decision called an award. 

Arbitrators are neutral third parties who often have some knowledge of the subject matter of the legal dispute. Each party will have a chance to present limited discovery, evidence, and arguments that they hope will sway the arbitral panel to decide in their favor. Most parties will also show possible solutions to the legal disputes. 

While it is considered a dispute resolution method, it is more formal. It relies on the decision of the panel rather than the parties. Because of this process, the system can have definite disadvantages for resolving legal disputes.

An essential part of arbitration is that it is voluntary due to its finality. There are cases of binding arbitration, but they are usually court-mandated. However, both parties must agree to participate in arbitration for it to be effective. This is most commonly contained in many arbitration clauses or agreements. 

This agreement can be created pre- or post-dispute. A pre-dispute agreement usually contains a contract stating that the parties agree to submit all disputes arising from the contract to arbitration. This is called an arbitration clause. If the parties agree to post-dispute, they often agree that the specific dispute will be submitted to arbitration. Still, the parties may choose other options for other disputes.  

Equality in Arbitration

A familiar disadvantage critics may note about arbitration hearings is that it can lead to inequality or inequity. This commonly refers to agreements to arbitrate included in the sale or use contracts where the buyer or user may not have known they agreed to arbitration by using a product or service. 

These are called contracts of adhesion. This often results in an arbitration agreement where one of the parties has far less money, power, and disposable income than the other. Therefore, it affects their ability to start and continue a dispute at the same level that the company that created the product and clause has. This type of agreement can result in forced arbitration, particularly with the finality of the arbitration decision.

This disadvantage is often the most significant criticism of arbitration, and naysayers frequently point to it undermining the arbitration proceedings as a whole. People can challenge the clause in court, which often results in more fees and costs. It may not result in the party being able to avoid arbitration, especially with the court’s preference for arbitration clauses standing. Regardless, the inequality resulting from such agreements can be detrimental to the arbitration process and the dispute itself.    

Finality 

Another disadvantage of arbitration is its finality. While this may seem advantageous to the person who wins the arbitration decision, it is not always the best result for the parties. For example, arbitration can be appealed only in minimal circumstances, and the underlying reasons for appeal may change from one arbitration provider to the next. 

Additionally, the parties will have to overcome the tendency for judges to uphold arbitration awards. These circumstances include:

The Error of Law

One way an arbitration can be appealed is if the award is based on a material and prejudicial error of law. This means that the error affected all or part of the arbitrators’ decisions and disadvantaged one party compared to the other. An error of law results from the arbitrator incorrectly applying or interpreting a law.  

The Error of Fact

A party may also appeal if there is a clear error of fact that is material and prejudicial. Similar to the error of law standard, it must affect the case outcome in a way that harms one party and not the other, and the error involves an important and central fact. An error of fact results from the arbitrator either leaving out, discounting, or misunderstanding a fact that was an issue in the case.  

Undisclosed Bias

A party can often appeal an award if the arbitrator fails to disclose a fact about themselves and their practice, resulting in a bias or perceived bias toward one party. Parties may agree to use a specific arbitrator despite bias, which cannot be challenged on this ground later. Still, if the parties go into arbitration without agreeing on the conflict, this may be grounds for reversal; however, it must be a significant factor in how the award was decided.  

Lack of Neutrality

Similar to the position above, a party may challenge an award if they believe that the arbitrator acted partially throughout the arbitration. This can be an obvious or subconscious bias toward one party that is not based on a prior connection but is seen in the actual process itself. If this bias or partiality affected the outcome of the arbitration, a party might challenge the award.  

No Opportunity to be Heard

One of the hallmarks of the arbitration process is that the parties have the chance to be heard equally. Every opportunity offered to one party to tell their story should also be offered to the other. If this is not the case, the party not afforded the same opportunities may challenge the award.

There may be other ways that a party can challenge the arbitration award. However, even with this list, it is clear that the options for relief after the award is issued are minimal. Additionally, the party challenging the award will likely have to pay costs and fees both during the challenge or appeal and after, especially if the appeal is not successful, which it is commonly not. 

This finality and lack of flexibility are often disadvantages of arbitration. In addition, the parties may feel that the lack of post-award options and the loss of control are too much for them to be comfortable with.  

Unpredictability

Another issue that parties can encounter in arbitration is the unpredictable nature of the arbitration itself. Unlike litigation, where the judge or jury has to find favor of one party or the other, the arbitrator can split the difference and issue an award that does not give either party the full extent of what they are asking for. 

Additionally, arbitrators have a lot of discretion. They may not have the skill set or knowledge to understand the dispute truly. A good arbitrator will do the necessary research and training to ensure that they make the proper decision, but that is not always the case. Not predicting how arbitration may go can push parties to choose litigation or mediation over arbitration.  

Control

As mentioned, the parties lose control over the outcome of their dispute when they submit it to arbitration. When parties participate in mediation, they can discuss the result and shape the agreement they create. However, in arbitration, the parties have to present their case and then hand the decision over to the arbitral panel for their decision. This lack of control over the outcome can make some parties uneasy with the process and discourage them from participating in arbitration. 

However, this disadvantage for some may be an advantage for others, especially those who have gone through other resolution mechanisms and could not reach a resolution. For these disputes, the lack of control may be how they resolve the dispute.  

Transparency

Litigation results in public records, and the courtrooms are open. Court decisions are often used in other court cases to help support a claim. On the other hand, arbitration is a confidential process that does not result in a public record for other people to use. 

While this can be beneficial in some cases, it can result in a lack of accountability and transparency. When the dispute resolves around a systemic issue that is consistently being arbitrated rather than published in a court decision, it can also result in inequities between the results in similar cases, harming the parties and how they view the result. Therefore, the lack of transparency can be a disadvantage to arbitration.  

Expense

While arbitration is often considered less expensive than litigation, it is not cheap. Parties in arbitration must pay the arbitrator’s and attorney’s fees during the dispute. In addition, because arbitration requires extensive preparation to ensure the right result, legal fees will often add up. 

Arbitration is faster than litigation, so it usually results in lower fees than litigation; however, arbitrator fees are typically more expensive upfront. Parties can negotiate the fees or ask the other party to pay them, but this is not guaranteed. Understanding that arbitration is not a cheap process can turn parties away from it.

Lack of Discovery

Finally, arbitration requires the parties to present their case and follow the arbitrator’s award or the arbitrator’s decision. However, the arbitration discovery process is not defined or developed, often leaving parties without access to documents and issues that may be important to the case. Because litigation provides a thorough discovery process, parties may choose litigation over arbitration to ensure they have the best evidence and support for their case.  

Conclusion

Arbitration can be an excellent option for some disputes, but it is not the best option for every particular dispute. The parties need to examine and identify the disadvantages of arbitration that may influence the outcome of their dispute. Understanding the issues the parties may encounter can help them make the best decision for their dispute—whether it is arbitration or not.  

Contact ADR Times to learn more about the disadvantages of arbitration, alternative dispute resolution methods, and more!

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Emily Holland
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