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This article was updated on September 21, 2023.
Ordinarily, when two parties to a contract have a legal dispute, they can turn to the court system to settle the issue. But depending on how the contract was drafted, the parties might not have that option. Instead, they may be forced to resolve their differences through arbitration.
Using specific language, commonly called a “dispute resolution” clause, parties can decide ahead of time that any possible legal disputes arising between them related to the contract must be handled through arbitration. Once the parties agree to do so, they cannot, except in limited circumstances, file lawsuits against each other. That’s because courts will generally enforce arbitration clauses in contracts when the parties have voluntarily agreed to them.
For some contractual relationships, arbitration will be the preferred method of resolving a legal dispute. For others, litigation is the best option. So why would the parties to a contract agree to arbitrate disputes rather than litigate them? There are several key differences between litigation and arbitration that drive that decision. The parties will need to balance the pros and cons of these differences to decide which path to take given the nature of the contract, their industry standards, and their preferences.
Here are six key differences between litigation and arbitration that parties should be cognizant of before deciding whether to include an arbitration provision.
Litigation is expensive. Lawyers must draft and respond to endless court filings throughout a lawsuit. They need to hire expert witnesses. They often must bring on outside consultants to assist with processing the documents exchanged during discovery. In most contractual disputes, the parties to the disputes are the ones footing the bill for these expenses, along with, of course, the cost of their lawyers’ time. Even worse, some contractual disputes will require a significant investment of time from a party’s employees or executives during the discovery phase. They will need to respond to their own lawyers’ requests for information and documents as well as their adversaries’ requests, which could include having to sit for depositions.
Arbitration, on the other hand, is generally not as expensive. One reason why is because discovery is normally limited in arbitration. Limited discovery also brings with it less opportunity costs to the parties in an arbitration because their employees and executives need not devote significant time to participating in the discovery process. In addition, there are not as many filings that must be prepared and responded to, nor are there as many hearings, in arbitration as compared to litigation.
Most of the time, court filings in lawsuits are public. This means that members of the public, particularly reporters and bloggers, can view the substance of the filings and provide them to the public. As a result, there may be publicity or social media buzz around a lawsuit that puts one party in a damaging light, impacting both its reputation and its business interests. In addition, court filings and publicity surrounding those filings can bring to light previously non-public facts that the parties would prefer to keep out of the public eye, such as tax records and other financial information. Confidentiality agreements entered by the parties may stop some juicy information from becoming public, but rarely will they stop it all.
For this reason, in many legal disputes, plaintiffs and their lawyers are happy to file a lawsuit against alleged wrongdoers to create pressure in both a court of law and the court of public opinion. But in certain disputes where both parties are likely to make unflattering factual and legal allegations against the other, such as in contract disputes, the public nature of the litigation could expose both parties to bruised reputations and wounded bottom lines.
By contrast, arbitration is almost always private. There is no public arbitration docket, so there is no public record of an arbitration taking place. Nor must the parties’ papers and other filings regarding the arbitration be filed publicly. Thus, there is often little concern about the media or other members of the public shining a spotlight on the parties involved in arbitration proceedings and the nature of their dispute.
Litigation is notorious for moving at a glacial pace. In most jurisdictions, a lawsuit filed today could take 18 to 36 months to get to trial. Crowded court dockets play a role in this delay, but so does the gamesmanship between lawyers. When lawyers don’t play nice by proactively complying with court rules regarding civil procedure and discovery, there will be more back and forth between the parties and judge than normal, which can slow the litigation process to a grinding halt.
Arbitration tends to move faster than litigation. For many arbitrations, the parties need to wait only a few months between commencing the process and attending the main hearing. Because there is typically less formalized procedure throughout an arbitration, there is less potential for competitiveness to slow down the process.
Besides moving slowly, litigation sometimes feels interminable. That’s because many decisions made by a judge or magistrate are appealable. When a losing party exercises its right to appeal a judicial decision, the parties must spend more time and money on the litigation by participating in the appeal process. Appeals also introduce uncertainty, as appellate courts could find partly for the appellant and partly for the appellee, so no party comes out of the appeal a clear winner. However, because most judicial decisions are appealable, parties know that they might have multiple attempts to obtain a favorable judicial decision—and that it might take a while for a favorable decision to become the final decision.
Most arbitration, on the other hand, is binding and non-appealable. This means that frequently, the arbitration decision will be the final word on the legal dispute (unless the parties agreed that an arbitration decision would be appealable, or, in some jurisdictions, the losing party can show there was bias or fraud by one or more arbitrators). The non-appealability of most arbitration decisions means that the parties involved will likely resolve their dispute with finality sooner than if they litigated it and had to wait out an appeal. But it also means that the parties lose an opportunity to challenge a third-party's decision regarding their dispute.
Litigation is unpredictable for several reasons even when the parties are clear about what the law is regarding a dispute. For one, it is not until a lawsuit is filed that a judge is assigned. That judge may be knowledgeable about the factual and legal issues underpinning the lawsuit based on experience—but probably not. Second, even though the parties to a lawsuit can research how their judge has ruled in earlier lawsuits regarding similar issues, there is no guarantee that the judge will decide the case consistent with those earlier decisions. Third, jurors are unpredictable. They can be swayed by emotion, the charm of a lawyer or witness, or their preexisting feelings for people or organizations like those in a lawsuit. This is a particular problem when millions of dollars are at risk. Finally, when a dispute involves complicated concepts, complex facts, and industry-specific minutiae—as most commercial disputes do—judges and jurors may get confused and decide a case without a solid understanding of the key issues presented.
Arbitration offers more predictability to its participants. The parties to an arbitration often choose at least one of the arbitrators who will be hearing their case. In addition, arbitrators frequently have experience with the industry the parties are in, or the issues that are the basis for the legal dispute. Thus, arbitrators are more likely than judges and juries to home in on the core issues of a dispute without being distracted by emotion, charm, or their feelings. Third, because arbitrators are hired and paid for by the parties to the arbitration, they are incentivized to decide the case fairly and arrive at the right resolution. Otherwise, they could be branded as biased or uninformed, which would damage their reputations and their ability to be hired again as arbitrators by other parties.
As noted, normally litigants cannot choose their judge. Litigants also must conform to their judges’ procedures and rules, as well as their jurisdictions’ rules of civil procedure and evidence. They are also often bound by a judge’s decisions regarding where to meet and when. This frequently means having to meet in the judge’s courtroom on dates and times best for the judge—no matter which of the parties’ previously scheduled events might need to be cancelled to accommodate the judge’s request.
Arbitrations, by contrast, are flexible. Besides usually choosing their arbitrators, the parties can often choose the set of arbitration rules they will abide by, such as the American Arbitration Association’s “Commercial Arbitration Rules and Mediation Procedures.” The parties also can tweak those rules (especially regarding discovery), how the arbitration hearing will progress, and other procedural aspects of the arbitration. The parties can also dictate where and when they want the arbitration hearing and other meetings to take place.
When parties negotiating a contract can determine whether they want to litigate or arbitrate legal disputes regarding that contract, they should carefully consider these key differences between litigation and arbitration. Determining whether these differences are pros or cons in their particular situations will go far in helping them decide which option to choose.
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