The Advantages and Disadvantages of Arbitration

In businesses, partnerships and investment transactions, many do not anticipate future litigation. However, when a dispute does indeed arise, there are many options to resolve it. If the thought of going to court and endure the trial ordeal displeases you, arbitration may be preferable, if parties to the dispute would all agree.

Arbitration is essentially a paid private trial, in other words, a method to resolve disputes without going to court. Parties will submit the dispute to a third party neutral arbitrator rather than the courts. Unlike a court bench or jury trial, the presentation may consist of just documents, though most often, both sides will still have attorneys to make oral arguments. However, before you decide to resolve your claim through arbitration, read the following to understand the advantages and disadvantages.

1. Efficient and Flexible: Quicker Resolution, Easier to schedule
   The dispute will normally be resolved much sooner. It may take several years to procure a court trial date, while an arbitration date can usually be obtained within a few months. Also, trials must be scheduled into court calendars, which are usually backlogged without hundreds, if not thousands of cases in front of you. On the other hand, arbitration hearings can conveniently be scheduled based on the availability of parties and the arbitrator.

2. Less Complicated: Simplified rules of evidence and procedure
   Litigation inevitably leads down a long path of filing papers and motions, and attending court processes such as motion hearings. The normal rules of evidence used in court may not be strictly applied in arbitration proceedings, making it much easier to admit evidence. Discovery, the time-consuming and expensive procedure that involves taking and answering interrogatories, depositions, and requests to produce documents, maybe largely reduced in arbitration. Instead, most matters, such as who will be called as a witness and what documents must be produced, are handled with simple phone calls with the arbitrator.

3. Privacy: Keep it out of the public eye
   Unlike a trial, arbitration leads to a private resolution, so the information brought up in the dispute and resolution can be kept confidential. This could be enticing for well-known public figures or clients in business disputes because all evidence, statements, and arguments will be completely confidential. On the other hand, in court, even if certain records will not be released, there is still a risk of some public access to potentially sensitive business information.

4. Impartiality: Choosing the “judge”
   The parties to the dispute usually pick the arbitrator together, so the arbitrator will be someone that both sides have confidence will be impartial and unbiased.

5. Usually less expensive
   Most of the time, but not always the case, arbitration is a lot less expensive than litigation. Arbitration is often resolved much more quickly than court proceedings, so attorney fees are reduced. Also, there are lower costs in preparing for the arbitration than there are in preparing for a jury trial.

6. Finality: The end of the dispute
   For binding arbitration, there are limited opportunities for appeal. That gives finality to the arbitration that is not often available with a trial decision, which maybe subject to appeals, new trials and further appeals.

7. For employers, class action waiver
   Recently in 2018, the Supreme Court of the United States confirmed that valid arbitration agreements can include a class action waiver. Therefore, many employers became more interested in including a class action waiver in the employment agreement in order to limit risk exposure.

1. Questionable Fairness

   1. Mandatory arbitration
      If arbitration is mandatory by contract, then the parties do not have the flexibility to choose arbitration upon mutual consent. In these cases, one party can force the other party to go to arbitration, even a jury trial maybe more advantageous to the other party.

   2. Subjective Arbitrator
      The process of choosing an arbitrator is not always an objective one. There are cases when the arbitrator could be biased because it has a business relationship with one party or is selected by an agency from a pool list. In those situations, impartiality is lost.

   3. Unbalanced
      Many arbitration clauses work in favor of a large employer or manufacturer when challenged by an employee or consumer who does not understand how arbitration works.

   4. “Arbitrarily” (inconsistently) following the law
      Although generally the arbitrator is required to follow the law, the standards used are not clear. The arbitrators may consider the “apparent fairness” of the respective parties’ positions instead of strictly following the law. This is important especially if your party would be favored by a strict reading of the law.

   5. No jury
      For most, having a jury is an important right that helps prevent biases and unfairness. Arbitration eliminates juries entirely, leaving matters in the hands of a single arbitrator, who acts as both judge and jury.

   6. Lack of transparency
      Arbitration hearings are generally held in private which may be a positive to many. However, it is possible that this lack of transparency makes the process more likely to be biased, which may be problematic because arbitration decisions are also infrequently reviewed by the courts.

2. Finality: No appeals
   While this may be a positive if you find the arbitration decision favorable, you should be aware that if arbitration is binding, both sides give up their right to an appeal. If one party feels the decision is erroneous, there is very limited opportunity to correct it.

3. Can be more expensive
   There are many cases in which arbitration can become more expensive than court proceedings. Quality arbitrators can demand substantial fees that would not apply in court. In non-binding arbitrations, the final decision or award in the case is not "binding" and the parties are free to take their issue back to court, essentially adding the cost of litigation to that of the prior arbitration. If you are on the employer side, employers must pay the arbitrator’s fees in full. This can be very expensive as arbitrators’ fees can be very high for cases in employment law.

4. Unpredictability: Unconventional outcomes
   As stated earlier, arbitration does not necessarily follow the formal rules of procedure and evidence that are involved in a courtroom trial. Rules of evidence may prevent some evidence from being considered by a judge or a jury, but this limitation does not apply to arbitrators. Thus, an arbitrator’s decision may be based on evidence that a judge or jury would not consider at trial, which could be damaging to your case. On the other hand, if certain information from a witness is presented by documents, then there is no opportunity to cross-examine the testimony of that witness.

   An arbitrator may make rulings that would not be appropriate in court or may push for unconventional solutions that you were not expecting. This could both be a pro or con, so you must carefully evaluate how this may affect your desired ruling.

Arbitration is a very useful tool for resolving disputes, but careful consideration has to be given as to whether it is applicable to or preferable in a particular dispute. At SAC Attorneys LLP, our experienced Silicon Valley business attorneys can advise you on the best method to pursue favorable judgments and compensatory damages. Contact us today at (408) 547-4288 to arrange a no obligation consultation.