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Arbitration or Litigation?

Having trouble choosing between the two? Here are some factors to consider when making your decision.

Opinions expressed by Entrepreneur contributors are their own.

The decision to arbitrate or go to court is core to the strategy in many contract negotiations and most commercial disputes. If the dispute involves technical issues or a small amount, or if the parties want to preserve a commercial relationship, arbitration may be better. If the dispute involves a complex legal issue such as the interpretation of a contract clause or the intent of a law or regulation, or if the relationship between the parties is marked by hostility, litigation may make more sense.

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Because the decision of how to resolve disputes is often made when the relationship is formalized--well in advance of any disagreement--businesses should consider the following features of each method as early as possible:

  • Arbitration is informal. In arbitration, the parties choose an arbitrator or select from among names provided by an outside organization such as the American Arbitration Association. In theory, arbitrators generally are fair-minded and have expertise in the subject of the dispute. Reality and theory may, however, diverge: The arbitrators on a list may not really have technical knowledge of the specific subject. And arbitrators, like juries, bring to the process their own biases and beliefs based on experience.

    For the most part, judges are assigned to cases randomly. They cannot be knowledgeable about technical issues of every case, and they rely on testimony and argument to make their decisions. Although they have considerable discretion, judges are bound by rules of procedure and evidence. Those rules are relaxed in arbitration proceedings. For example, "hearsay" evidence is frequently admitted, and contract interpretation cases may permit testimony that would be inadmissible in a trial. This informality may work against a party if the dispute hinges on documents and testimony that a judge would not admit as evidence, just as it may benefit a party that has reason to fear tough evidentiary standards.

  • The right to appeal is limited in arbitration. In court, the loser may appeal. Ordinarily, the loser will have no such right in arbitration. Parties in arbitration should assume that an arbitration award will be final.
  • Arbitration is generally faster and less expensive than litigation. An arbitrated dispute can usually be resolved in a matter of months. Arbitration proceedings can, however, drag out--they are hostage to the schedules of the arbitrators, attorneys and witnesses. This discontinuity can be disruptive and add costs if arbitrators have to take extra time to refresh their memories after long pauses between hearings.

    Limiting discovery, the process through which each side obtains case-related information from the opposition in preparation for the hearing, is what makes arbitration less expensive than litigation. Limited discovery can, however, make it difficult to prepare a case if the necessary information is in the exclusive possession or control of the opposing party, and it can result in unpleasant surprises at the hearing. Litigation can take years because of discovery and crowded court calendars. In litigation, however, once a hearing has started, it usually continues until it is completed, although frequently at a slower pace than in arbitration.

  • While arbitration is usually less expensive than litigation, it is by no means inexpensive. In litigation, the government supplies the judge, the courtroom, the jury and court personnel. In arbitration, the parties pay the arbitrators, the court reporter and sometimes a facility charge. These fees can add up in lengthy proceedings. If an outside organization, such as the AAA, administers the arbitration, it levies filing and case administration fees proportional to the amount in dispute. Large, complicated and protracted cases can therefore generate high costs in addition to the attorneys' fees that the parties would incur in either arbitration or litigation. Arbitrators can assign these arbitration costs to one party or the other, but they often simply split the costs equally between the parties.
  • Arbitration is confidential. Arbitration proceedings are ordinarily confidential. Court rulings are a matter of public record, and trials are open to the public. There may be advantages to airing a dispute in public or to winning a public victory or public exoneration. If it is important to keep the terms or nature of the dispute confidential, arbitration is preferable.
  • The judicial process may promote settlement. A party's litigation costs may exceed the value of the potential award. The possibility that both parties could come out of litigation with a net loss may induce them to negotiate. At various points during the judicial process, they are required to discuss a settlement, often with the judge's help. This is usually not the case in arbitration.

If you believe that the law is on your side, if the stakes are large and if an amicable relationship with your adversary is not a primary consideration, traditional litigation may be a better choice for resolving your dispute. It may also provide an incentive to discuss an early settlement.

John R. McGinley Jr. is an attorney in the corporate division of Eckert Seamans Cherin and Mellott LLC. He made be contacted at (412) 566-6000.