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Arbitration: Always A Great Idea! Or Is it?

Arbitration: Always A Great Idea! Or Is it?

SML Perspectives
(March 10, 2011)

Business contracts are negotiated every day and each one presents the potential for a legal dispute. Should you deal with a potential dispute ahead of time by including an arbitration clause in your contract? Not so fast. Today, arbitration clauses in business contracts have become so common that businesses are not giving the disadvantages of arbitration their proper consideration. Before you follow the arbitration trend, give the potentially significant downside some thought.

It’s often said that arbitration is a great idea -so long as you win. The perceived benefits of arbitration generally are minimized expense and more predictable results. Not only do these benefits not necessarily bear out, but even if they do, it may come at the expense of your full rights. Consider the following reasons why arbitration, as opposed to litigation, is not always the right choice:

Arbitration is not always cheaper. Like litigation, arbitration usually involves a filing fee and some expense for discovery. But, in addition, an arbitrator will charge you by the hour for his or her time, where a judge in court comes free. If you have a panel of arbitrators, the entire panel charges you. Arbitrator fees and case administrative fees, depending upon the tribunal, can mount quickly. Furthermore, arbitration typically has no procedure for disposing of the case short of a full hearing. Thus, even if arbitration may be less expensive when compared to a full trial, there is rarely any way to avoid going through a full-blown arbitration hearing because there is no mechanism for pre-hearing adjudication, even where appropriate.

Typically, arbitration does not provide the type of liberal discovery that traditional litigation does. There may be some cost savings in this, but you may pay for it in other ways when you cannot get the information that you need, either from the other party or from third parties, to properly prove your case. Plus, the cost saving is no guarantee as some arbitrators may use their considerable discretion to order discovery every bit as burdensome as is found in traditional litigation.

Arbitration rarely, if ever, offers any right to appeal or vacate an award if a mistake, no matter how egregious, is made. Furthermore, the arbitrator, or panel of arbitrators, can be every bit as arbitrary as a judge or jury. Because the grounds for overturning an arbitrator’s decision are few and the chances of succeeding slight, you risk your entire fate in a single individual or small panel.

Procedural or technical defenses, such as the applicability of the statute of limitations, are less likely to be effective in arbitration because arbitrators are allowed to focus on fairness without having to follow the law. If you have a strong procedural or technical defense, you might be better off in court. Frequently, if victo­ry for one side means a harsh result for the other side, arbitration has a reputation, well deserved or not, for “splitting the baby.”

An arbitrator’s decision, unlike a legal opinion, will not bar the filing of other lawsuits based upon the same or similar issues. This is a huge disadvantage if you prevail at arbitration and have a series of contracts that may give rise to the same or similar dispute in the future.

Enforcement of an arbitration award requires confirmation by the court. This involves judicial intervention, and there is delay associated with this requirement. In other words, arbitration lacks any independent means of enforcement for a prevailing party.

Perhaps the most important thing to remember is that a decision to include an arbitration clause is likely your final decision with respect to how a commercial dispute will be resolved. Public policy strongly favors parties resolving their disputes privately rather than in the courts. Therefore, arbitration clauses will be enforced even if you decide later that you would rather litigate. So, a decision to arbitrate at the outset is one that you will have to live with.

If you choose not to include an arbitration clause, nothing prevents the parties from later submitting a dispute to arbitration if both sides agree to do so. Consider all your alternatives before following the trend toward arbitration. You may just want to preserve your rights and stick to the courts.

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