Whether considering including an arbitration clause in a draft contract, or contemplating arbitration after a dispute has arisen, business people are often confronted with the decision of whether to agree to arbitration in lieu of court litigation. An informed decision requires examination of often held expectations about arbitration.
Expectation No. 1: Arbitration Is Cheaper.
Arbitration might be cheaper, but not necessarily. Savings in arbitration may come from possibly limited discovery, e.g., depositions, document productions, interrogatories, and the like.
Discovery in arbitration ranges from none, to all that is available in conventional court litigation. The scope depends on the arbitration rules the parties select in the arbitration clause in the contract, or if not specified, then the rules adopted or imposed when a dispute arises. If there is substantial discovery, then cost savings are unlikely, and arbitration could easily cost more.
Offsetting the potential savings from reduced discovery are arbitration costs not required in court litigation. Arbitrator's fees may be $400-$700 per hour and total tens of thousands of dollars or more.
The arbitration administrator, e.g., the American Arbitration Association, usually also charges substantial administrative fees. The AAA’s fees currently range from $1,550 to $82,500 depending on the amount in controversy. These fees do not include the arbitrator’s fees.
Reduced discovery saves money, but it also increases the uncertainty of outcome. The parties will arrive at the hearing not fully knowing what the opposing evidence will be, not as prepared for cross-examination, and possibly not equipped with rebuttal evidence. Reduced discovery may also deprive a party of evidence supporting its case.
Whether arbitration is cheaper depends on the scope of discovery and the amount of offsetting arbitration costs and fees. Even if the net costs are less, the tradeoff may be a less certain outcome.
Expectation No. 2: Arbitration Is Quicker.
As with costs, arbitration might be quicker, but it is not necessarily so.
Reduced discovery may save time. This potential time savings is subject to the scope of discovery as discussed with respect to costs, above.
Another time reduction comes from earlier finality due to lack of appellate rights. Arbitration decisions are nearly non appealable.
One prominent example is NFL quarterback Tom Brady’s case. An arbitration decision confirmed his suspension for four games. Brady challenged the arbitration decision in court, and lost. The court confirmed the arbitration award, not based on reevaluation of the evidence or the merits, but on the strong policy of deference to the decisions of arbitrators. In another case, the US Supreme Court has held that even grave error is not enough to overturn an arbitrator’s award, good, bad or ugly.
Whether early finality from lack of appellate rights is an advantage depends on whether the arbitration award is favorable. The winning party is grateful for the finality of no appellate review. For the losing party, the lack of appellate rights is a disadvantage. It is impossible to know in advance which party will be which.
The time until the arbitration hearing (trial) ranges several months sooner than a court trial, to about the same time as when a court trial would be set. An arbitration hearing could be set as early as 6 to 9 months after filing if there is little or no discovery. Most court cases, and some arbitrations, are tried within one to two years after filing.
Ultimately, the arbitration hearing itself is likely to last at least as long as a court trial. Evidence and arguments are presented much the same manner as in a court trial. Some judges might limit the parties’ time for presentations of their cases, but this is unlikely with arbitrators. One of the few grounds on which the arbitration award can be overturned is the arbitrator(s)’ failure to consider relevant evidence. Coupled with being paid by the hour, this creates an incentive for arbitrators to allow parties to present almost any evidence they want, over the objection of other parties, thereby lengthening the hearing.
Arbitration might be faster, but not always, and at a loss of discovery and appellate rights.
Expectation No. 3: Arbitration Is Fairer.
Fairness is a function of who decides and on what basis. The twelve heads of a jury, instructed and supervised by a judge, are usually better than one. A single arbitrator might overlook some of the evidence, have predilections or biases, or just get it wrong on the facts, the law or both. Using three arbitrators instead of one mitigates against the risk, but triples the arbitrators’ fees.
Court trial outcomes can be appealed for errors by the judge. Arbitration awards generally cannot. Some arbitration administrators such as AAA and JAMS now offer appeals of arbitration decisions to special arbitration appellate panels, but of course, there are additional costs for this.
Because of limited discovery, lack of a jury, and limited appeal rights, arbitration outcomes are riskier and more final than court litigation. It is hard to see why arbitration would be fairer than court litigation.
Arbitration is litigation, just not in court. Arbitration might be the right choice for some cases. Limited discovery rights and costs might be preferable when less is at stake. Arbitration might feel less adversarial, which could be an advantage when the parties hope to preserve ongoing relationships. Arbitration lends some confidentiality. Earlier finality of arbitration might be worth the tradeoff of forgoing appellate rights.
One size does not fit all. The advantages and disadvantages of arbitration should be considered in each circumstance.
* Duane Horning is an arbitration and court trial attorney, and the owner of California Business Law Group, PC. He specializes in resolving business, intellectual property, real estate and trust and estate disputes. He has never lost an arbitration.
This document is intended to be only limited summary information and only for educational purposes. It is not a comprehensive description of laws, rules or other considerations. It does not constitute legal advice. Consult legal counsel for advice on a particular case.
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