Legal Updates

Planning For The Worst: Litigation Or Arbitration?

Employment and commercial agreements often include provisions designating how potential disputes between the parties will be resolved. One common term is a stipulation that any controversies arising from the agreement will be decided through binding arbitration, in lieu of court litigation.

Parties often agree to arbitration because they believe it will be a swifter and less expensive means of resolving a dispute than litigation. In many cases, that may well be true. At the same time, however, it’s important to be aware that arbitration can also entail potential risks and disadvantages. For this reason, rather than taking a one-size-fits-all approach, organizations should carefully consider whether litigation or arbitration would be a better way of resolving potential disputes under each individual agreement they enter into.

Below, following a short description of the arbitration process, are some important factors to consider in deciding whether future disputes should be resolved through arbitration or litigation.

What Is Arbitration?

In its essence, arbitration is a voluntary, binding dispute-resolution process that takes the place of court litigation. Unlike in litigation, parties typically participate in selecting the arbitrator, pre-hearing proceedings are not extensive, and arbitration hearings are somewhat less formal than court trials.

Frequently, arbitrators are engaged through a professional organization, such as the American Arbitration Association (“AAA”), which assists with the logistical details of the proceeding. This is not required, however, and in some cases – such as many collective bargaining agreements between employers and unions – the parties simply designate a particular individual to arbitrate all disputes arising under the contract.

Following the conclusion of the hearing, the arbitrator renders a written decision (known as an “award”), setting forth his or her view of the evidence and resolution of the dispute. Generally, an arbitration award is final and binding, and a party may, if necessary, ask a court to enforce the award. Only in very narrow circumstances – for instance, where the arbitrator had an undisclosed conflict of interest or blatantly disregarded the law – will a court overturn or modify an arbitration award.

Advantages Of Arbitration

Resolving disputes through arbitration rather than litigation can offer a number of advantages, including the following:

  • Typically, if a specific arbitrator has not been designated in advance, the parties jointly select the arbitrator, from a list of candidates provided by the AAA or other dispute-resolution organization. Because each party is able to “veto” a certain number of candidates, this enables them to avoid those arbitrators they consider least acceptable.
  • The interval between the submission of an arbitration demand and the commencement of the arbitration hearing is typically much shorter than the span between the filing of a civil complaint and a court trial. For this reason, disputes often can be decided more swiftly through arbitration than litigation.
  • Pretrial motions – a major component of civil litigation – are uncommon in arbitration. This can help make arbitration swifter and less expensive than litigation.
  • Similarly, pretrial discovery (e.g., witness depositions and exchanges of documents) normally does not occur in arbitration. (However, the AAA rules provide that an arbitrator may order pre-hearing discovery “consistent with the expedited nature of arbitration.”)
  • As noted above, an arbitration award may be overturned or modified by a court only in very limited circumstances. Thus, the possibility of a lengthy and expensive appeal and retrial does not loom nearly as large in arbitration as in court litigation.

Downsides To Arbitration

At the same time, parties should consider potential disadvantages to agreeing to resolve disputes through arbitration.

  • Arbitration may not necessarily prove less expensive than litigation. For instance, the fact that pre-hearing motions generally are not a part of arbitration means that the parties normally have to prepare for (and conduct) a full hearing. By contrast, civil lawsuits are frequently resolved through pre-trial motions, making full trial preparation unnecessary.
  • Likewise, arbitrations are not always resolved more quickly than civil suits. In particular, when an arbitration hearing stretches over multiple days, as is fairly common, there can be significant intervals between the hearing dates, due to the difficulties of finding dates that fit the busy schedules of the witnesses, the attorneys and the arbitrator.
  • An arbitrator generally does not have the ability to issue a preliminary injunction – i.e., an order freezing the status quo in some manner pending the arbitration hearing and award. Thus, before agreeing to include an arbitration provision in a contract, the parties should consider adding a carve-out entitling them to seek preliminary injunctive relief in court.
  • The general unavailability of pre-hearing discovery in arbitration can also be a disadvantage, as a party may be unable to obtain important information about its opponent’s case in advance of the hearing.
  • Finally, if the events giving rise to a dispute involve potential claims against third parties, it may be difficult or impossible to bring those parties into the arbitration proceeding. This could make obtaining full relief much more complicated and expensive.

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As these competing factors suggest, whether to include an arbitration provision in a contract is not a simple decision. Our attorneys have a wealth of experience in court litigation as well as arbitration, and we would be happy to help guide your organization in making this determination.