When two companies get in a dispute, a lawsuit can be a frustrating solution. After all, litigation can drag on for years without a resolution, costing both parties thousands or even millions of dollars in the process. For many companies, this process is so acrimonious that the parties can never trust each other enough to work together again, ending profitable business relationships. When you add in the bad publicity, lawsuits can cost a company even more. Arbitration offers an alternative.
Arbitration offers companies a private, quick way to settle contractual disputes, so that business can carry on as usual and all parties can get a fair outcome. If you are drafting a contract, it may be a good idea to discuss including an arbitration clause for dispute resolution with your contract lawyer. And if you are considering arbitration after a dispute has arisen, an arbitration lawyer from the Priori network can help you settle an existing case through arbitration with the best outcome possible.
What Is Arbitration?
Arbitration is an alternative dispute resolution procedure parties can choose instead of going to court. Arbitration must be consensually chosen by both the parties—usually in the original contract between two parties. Any applicable law, language, and venue can be chosen for arbitration, and arbitration is generally considered a more neutral option in international trade. Most importantly, arbitration is confidential, which means that the details of the case are kept from public record and both parties can avoid public scrutiny.
During arbitration, parties present cases in a similar manner as they would in a court case to the panel of arbitrators who were chosen by the parties themselves by mutual assent. While arbitration generally proceeds in a less formal manner than a court case, each side has a chance to produce evidence, call witnesses, and give testimony, just like in a court case. Both parties generally are represented by arbitration lawyers who ensure that the case goes as smoothly as possible. Once each side has presented their case, the arbitrators debate and rule. Outcomes handed down by arbitrators are binding—although in some cases they can be appealed.
When Is Arbitration Used?
Arbitration can be used in almost any situation where you could sue. The outcome can then be enforced by the courts just like any other judgement. Still, arbitration is most commonly used in B2B contracts, especially in international trade.
Mandatory Arbitration Clauses
Any two parties in conflict can mutually choose arbitration as an alternative dispute resolution forum, but many contracts now contain mandatory arbitration clauses that force the dispute into arbitration rather than litigation. Both parties are assumed to have previously consented to the arbitration, waiving their right to be heard in court.
These clauses have been the source of much dispute, as they tend to favor the larger party, especially when involving consumers or employees. Today, the courts will almost always uphold a mandatory arbitration clause agreed to by both parties in a contract, even if it is a standard contract that the consumer could not negotiate. Still, this is changing. Federal courts have rejected any mandatory arbitration clauses in employee contracts, as well as consumer financial services agreements. Furthermore, mandatory arbitration clauses cannot preclude class action, which means that some consumer contracts with mandatory arbitration clauses have been similarly rejected.
Pros of Arbitration
There are many advantages to arbitration—a fact which has led to its growth in recent years. The following are some of the key pros of arbitration:
Less hostility. Arbitration is generally considered to be less hostile than litigation, as parties are often encouraged to work together to structure the settlement—a benefit when your company wishes to continue the business relationship.
Privacy. Arbitration proceedings and final settlements are generally confidential, which allows companies to settle disputes without added media scrutiny.
Lower cost. While parties still generally have to pay for lawyers and must pay the costs of the arbitrators themselves, arbitration still usually costs less in the long term, because disputes can be settled more quickly and have fewer chances for appeals.
Expediency. An average arbitration is settled in just over a year from filing to decision, while the same types of cases would take an average of three years—and almost always at least 18 months.
Flexibility. Procedural rules in arbitrations are quite flexible—matters of evidence and witness lists can be approved in a brief phone call. Court procedures cannot be adjusted, however, which means they take much longer to settle. Plus, arbitrations can be scheduled around parties obligations, while courts give very little flexibility in terms of scheduling.
Cons of Arbitration
While often an appealing alternative, arbitrations also have many disadvantages that make them less appealing in certain situations. The following are some of the key cons of arbitration:
Limited recourse for appeal. While most formal arbitration organizations do have some appeal options, most arbitration decisions are binding. It’s much more difficult to set aside an arbitration outcome than a court’s determination.
More weighted in the favor of larger parties. Arbitration can sometimes favor the larger party more heavily, especially in cases that involve consumers. Arbitration is much newer and less public than court proceedings, and sometimes individuals can be overrun by more sophisticated parties with arbitration experience.
Lack of transparency. Because arbitration is confidential, it lacks the transparency and safeguards that limit courts when making a decision.
Rising costs (and uneven cost allocation). Although arbitration is currently less expensive than litigation, the rising costs of the arbitrators fees continue to climb. This is especially prohibitive to smaller companies and consumers, as even initiating a case costs quite a bit of money—and those costs will initially be borne by both parties.
What’s the difference between arbitration and mediation?
Both arbitration and mediation seek to resolve disputes outside of the courts without resorting to formal litigation, but they are not the same types of processes. Mediation involves a negotiation between the parties that is non-binding with the mediator serving more as a facilitator than anything else, while arbitration operates more like an informal court with the arbitrator operating as a judge. In arbitration, the “ruling” is final and binding, but mediation does not always result in a specific binding solution. While both mediation and arbitration seek to resolve the conflict more quickly and privately, only arbitration can result in a binding outcome that a party does not agree with totally.
When is arbitration not allowed?
Mandatory arbitration has been prohibited in the United States in employee contracts and consumer financial services agreements, and it is limited in consumer contracts.
Should all contracts contain arbitration clauses?
That depends on the needs of your company. Arbitration clauses are becoming more common, especially in international trade, especially because they are confidential and generally resolved more quickly than in court. That said, it’s best to discuss each individual case with an experienced contracts lawyer who can better explain the advantages and disadvantages of each choice in your unique situation.