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

The decision to arbitrate or go to court is core to the strategyin many contract negotiations and most commercial disputes. If thedispute involves technical issues or a small amount, or if theparties want to preserve a commercial relationship, arbitration maybe better. If the dispute involves a complex legal issue such asthe interpretation of a contract clause or the intent of a law orregulation, or if the relationship between the parties is marked byhostility, litigation may make more sense.

Because the decision of how to resolve disputes is often madewhen the relationship is formalized--well in advance of anydisagreement--businesses should consider the following features ofeach method as early as possible:

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

  For the most part, judges are assigned to cases randomly. Theycannot be knowledgeable about technical issues of every case, andthey rely on testimony and argument to make their decisions.Although they have considerable discretion, judges are bound byrules of procedure and evidence. Those rules are relaxed inarbitration proceedings. For example, "hearsay" evidenceis frequently admitted, and contract interpretation cases maypermit testimony that would be inadmissible in a trial. Thisinformality may work against a party if the dispute hinges ondocuments and testimony that a judge would not admit as evidence,just as it may benefit a party that has reason to fear toughevidentiary standards.

• The right to appeal is limited in arbitration. In court,the loser may appeal. Ordinarily, the loser will have no such rightin arbitration. Parties in arbitration should assume that anarbitration award will be final.
• Arbitration is generally faster and less expensive thanlitigation. An arbitrated dispute can usually be resolved in amatter of months. Arbitration proceedings can, however, dragout--they are hostage to the schedules of the arbitrators,attorneys and witnesses. This discontinuity can be disruptive andadd costs if arbitrators have to take extra time to refresh theirmemories after long pauses between hearings.

  Limiting discovery, the process through which each side obtainscase-related information from the opposition in preparation for thehearing, is what makes arbitration less expensive than litigation.Limited discovery can, however, make it difficult to prepare a caseif the necessary information is in the exclusive possession orcontrol of the opposing party, and it can result in unpleasantsurprises at the hearing. Litigation can take years because ofdiscovery and crowded court calendars. In litigation, however, oncea 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 governmentsupplies the judge, the courtroom, the jury and court personnel. Inarbitration, the parties pay the arbitrators, the court reporterand sometimes a facility charge. These fees can add up in lengthyproceedings. If an outside organization, such as the AAA,administers the arbitration, it levies filing and caseadministration fees proportional to the amount in dispute. Large,complicated and protracted cases can therefore generate high costsin addition to the attorneys' fees that the parties would incurin either arbitration or litigation. Arbitrators can assign thesearbitration costs to one party or the other, but they often simplysplit the costs equally between the parties.
• Arbitration is confidential. Arbitration proceedings areordinarily confidential. Court rulings are a matter of publicrecord, and trials are open to the public. There may be advantagesto airing a dispute in public or to winning a public victory orpublic exoneration. If it is important to keep the terms or natureof the dispute confidential, arbitration is preferable.
• The judicial process may promote settlement. Aparty's litigation costs may exceed the value of the potentialaward. The possibility that both parties could come out oflitigation with a net loss may induce them to negotiate. At variouspoints during the judicial process, they are required to discuss asettlement, often with the judge's help. This is usually notthe case in arbitration.

If you believe that the law is on your side, if the stakes arelarge and if an amicable relationship with your adversary is not aprimary consideration, traditional litigation may be a betterchoice for resolving your dispute. It may also provide an incentiveto discuss an early settlement.

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