Litigation vs Arbitration

Lately, I have talked to a lot of business people who are confused about the difference between litigation and arbitration. They are also confused about whether they should include a binding arbitration provision in their contracts. While there is no one correct answer for everyone, I will briefly describe each, and dispel some of the most common misconceptions.

Litigation – Is a method of resolving disputes between individuals and/or companies. Litigation involves filing a complaint in court (the specific court you file in will vary based upon the specifics of the dispute) and proceeding before a judge and possibly a jury in order to reach a resolution.

Arbitration – Is an alternative method of resolving a dispute. With arbitration, all sides agree in advance to submit their dispute to one or more third-party arbitrators and agree to abide by the decision. Usually, arbitration is controlled by a contractual arbitration agreement. Each of these methods has its advantages and disadvantages; although the “common knowledge” about arbitration and litigation is not always correct.

The term “fairness” can be tricky to define, especially in this context, but let’s look at some of the mechanics of each option. With litigation, you have a judge that attempts to be impartial, you have a set of procedural rules, you have a set of laws, and you have a long history of previous decisions that interpret the law and that the judge will attempt to follow.

With arbitration, you have one or more arbitrators who will attempt for be impartial, you have a much looser set of procedural rules, you follow the same set of laws, and although there are the same previous decisions interpreting the law, often arbitrators do not feel the same obligation to follow those decisions as judges. Because arbitration is less formal and not as tied to case law as arbitration, it can be a bit more uncertain. However, I don’t think this automatically makes it less fair. In fact, sometimes it may be more fair because bad case law does exist. On the other hand, clients often interpret the uncertainty as unfairness.

If you are not comfortable with the less rigid structure, you should probably opt for litigation over arbitration.

It used to be the automatic answer that arbitration is faster than litigation, but especially in recent years, that is no longer true. An individual litigation can run very quickly, and an individual arbitration can drag on for years. Much of the speed of the case depends on the individual judge or arbitrator. In my experience, judges have gotten much better at moving their cases along, and some arbitrators have become more willing to allow delays. Additionally, because the arbitration rules tend to be more flexible, there are more opportunities for delay.

The bottom line on speed is that if your primary concern is a quick resolution, arbitration is not necessarily the best choice. The better approach is to consult with a local attorney about the tendencies of the local judges and then include a choice of forum in your contracts.

In this case, arbitration clearly has the advantage over litigation. The desire for privacy is the main reason I would recommend arbitration to clients. Litigation involves filing your case publicly with a court. With very limited exceptions, when you or your attorney appears in court, the proceeding is open to the public. This can be a problem, especially for a business that would prefer to keep its disputes out of the public eye. Arbitration, on the other hand, is a private process. Often, no one except the parties involved know about the dispute. This is one good reason why businesses sometimes prefer arbitration in their contracts.

Many businesses seems to fear the potential giant awards that a jury may saddle them with if they opt for litigation. However, there have recently been some shockingly large arbitration awards against some very large companies. Unfortunately, with an unreasonably large arbitration award, a company has very little recourse to challenge the award. On the other hand, a large jury award may be reduced by a judge (based upon the size of past awards for similar conduct) and there is always the option to pursue an appeal. If you think you are protecting your business from potential giant awards by contractually agreeing to binding arbitration, you are mistaken.

There are advantages and disadvantages to both litigation and arbitration.There are many individual factors your business should consider before agreeing to one forum over the other. In order to make the best decision, it is worth your time to consult with an experienced litigation/arbitration attorney.