Are Arbitration Agreements Effective Tools?

As law progresses and builds upon past common law and similar traditions, it is understandable that we often forget the history of the law's evolution. This is especially true where dispute resolution is concerned, since diverse tribunal systems have resolved commercial disputes since the Middle Ages.

Mercantile disputes in England, for example, were often decided by courts referring cases to either arbitrators or a jury of fellow merchants. Naturally, what was meant by "arbitration" hundreds of years ago is a far cry from today's arbitration. Even so, the long-standing tradition of alternative dispute resolution serves as a convincing reminder that arbitration agreements have been used for centuries as an effective tool for resolving legal disputes.

Whether arbitration is the best way to resolve a legal dispute depends on the relevant circumstances and considerations affecting your specific legal disagreement, but generally an arbitration agreement is a cost-effective, timely way to resolve a wide range of legal disputes.

Arbitration Provides Enhanced Privacy during the Dispute

Many businesses will create contracts that require disputes to be resolved through arbitration by creating an arbitration clause within a business contract. One of the reasons why arbitration clauses may be preferable to litigation is that these clauses allow parties to resolve disputes privately.

Not only is litigation in a courtroom expensive (U.S. corporations are thought to pay more than $20 billion each year to litigation lawyers), but the damage of a public trial can also be lasting. Businesses that become involved in high-profile trials risk losing the lawsuit as well as losing favor in the court of public opinion. Consider, for example, the lasting damage that can occur when giant companies publicly engage in legal battles worth hundreds of millions of dollars, such as the Apple vs. Samsung patent case.

There are times where such publicity may be desirable, but often businesses prefer the privacy that arbitration guarantees. Simply put, arbitration is private and informal, whereas litigation is a formal resolution that takes place publicly.

Arbitration Can Expedite the Timeline to a Resolution

According to findings from a recent American Arbitration Association Study (AAA), federal courts take far longer to resolve disputes at trial as well as on appeal when compared to arbitration. In fact, it takes more than a year longer for litigation disputes to even reach the trial phase in U.S. District Court cases.

Further, District Court and Circuit Court litigation added 21 months to the resolution timeline when cases were appealed, while the typical arbitration dispute was resolved in less than one year. These findings are a reminder that, when a timely resolution is important for businesses, arbitration clauses merit strong consideration.

Fast and Effective Dispute Resolution Often Translates to Business Cost-Savings

In the aforementioned AAA study, another key finding was that costs increased markedly when litigation was prolonged. This is a general truth of litigation, but seeing the study's concrete findings on financial harm is eye-opening, to say the least.

Between 2011 and 2015, the direct costs associated with the lengthier time to trial in District Court cases were between $10.9 and $13.6 billion more than arbitration costs. Given that these findings came from an arbitration association, it is reasonable to perhaps disagree with the methodology employed in the study, but the general principle holds true. Namely, lengthy litigation proceedings will almost certainly be far more expensive than arbitration when settling business disputes.

Rules of Evidence Generally Do Not Apply in Arbitration

As a general principle, rules of evidence do not apply in arbitration. This simply means, broadly, that arbitration has a limited evidence process whereby the independent arbitrator has control over what evidence is allowed. By contrast, lawsuits in the courtroom will require the full disclosure of evidence to both parties, which is one reason litigation tends to be a more time-consuming affair.

In arbitration, disputes will be resolved without the use of:

• subpoenas,
• discovery, or
• interrogatories.

Still, this means that far more evidence may be presented than would otherwise be allowed in a typical courtroom setting. If the arbitrator is inclined to give a great deal of latitude to oral evidence and similar informalities, then this can extend the timeline of arbitration resolutions as well. As such, while arbitration typically leads to faster, cost-effective resolutions, this is not always the case for particularly substantial business disputes that rely on expansive amounts of informal evidence.

Arbitration Has Limited Appeal Rights

One of arbitration's most limiting features (at least at first glance) is the fact that the right to appeal an arbitrator's decision is limited. Whether arbitration will be final or binding will depend largely on the arbitration agreement signed in a contract before any arbitration process begins months or years later.

If the parties to the contract agreed to arbitration, then the decision can only be overturned by court review after a proper appeal is filed. If non-binding arbitration is chosen when creating legal contracts between businesses, then an arbitrator's award can be rejected. In such an instance, the party who is unhappy with the non-binding decision will request a formal trial in lieu of arbitration.

This, naturally, poses the question of why parties would want to agree to such a form of arbitration, particularly given the financial and time considerations of litigation that have already been described. Non-binding arbitration is typically ideal for parties that wish to reserve the right to go to trial if arbitration results prove unfavorable, even though a fair resolution is still preferred.

It ought to be said that arbitration's "limited" appeal rights are not nearly as bad as they seem at first glance. Since an arbitrator's decision is generally final for parties who include a binding arbitration clause, this provides an incentive for parties to negotiate fairly and reasonably in pursuit of an amicable resolution.

Since neither party wants to be left with a binding decision that is unfair in their subjective view, such clauses are often used to bring parties to the table with better negotiating terms that lead to a better resolution for both sides.

Arbitration Provides Some Limited Control over the Arbitrator

Another valuable aspect of arbitration is the control over who hears the dispute. In litigation, judges are typically, but not always, randomly assigned cases. In contrast, arbitration provides parties in a dispute with some valuable controls over the arbitrator that is ultimately chosen to hear the dispute.

This control, however, assumes that the parties can agree on the independent party who ought to be assigned by the arbitration organization involved. Once again, however, the need for both parties to agree helps ensure that reason and fair-minded negotiating will prevail.

In the event that parties cannot agree, it is still possible for both parties to list their preferred arbitrators. The lists of both parties can then be passed on to the arbitration's case manager, who is tasked with selecting an arbitrator that fairly reflects the needs and concerns within the included arbitrator lists of both parties.

The ability to select an arbitrator helps arbitration parties find a neutral decision-maker who, while neutral, is known to apply the law fairly and in a way that may even be favorable to the business for the issue at hand.