Conventional wisdom teaches arbitration is more cost-effective and predictable than litigation in court.
As with most widely held beliefs, these claims are not universally true. Thus, counsel should carefully consider whether the benefits of an arbitration clause are appropriate for the prospective contract.
Is arbitration more cost-effective than litigation?
Arbitration can be more efficient than litigation. In arbitration, discovery is very limited, whereas in litigation, discovery is usually the single biggest cost item.
Furthermore, there is generally little to no motion practice in arbitration, with motions typically dealing only with venue or questions regarding the arbitrator’s qualifications.
Thus, the countless hours spent by counsel in litigation drafting briefs and memoranda of law are curtailed. Nonetheless, in many cases, hidden costs of arbitration offset such savings.
All too often, arbitration costs more than litigation.
In litigation, a party is most often responsible only for court costs and its own attorney’s fees. In arbitration, the parties must also shoulder the fees of the arbitrator, or more often, arbitration panel.
Moreover, the filing fee for litigation is a few hundred dollars. In arbitration, filing fees can exceed $10,000. Additionally, not all motion practice in litigation increases costs.
In litigation, the case may be cut short due to dispositive motions. Arbitrations, as a practical matter, cannot be fully resolved before a final hearing on the merits.
Thus, arbitration may result in increased expenses of conducting discovery and a final hearing on a case that in litigation may have been resolved sooner.
Arbitration frequently breeds collateral litigation. Specifically, parties to a contract with an arbitration clause often litigate whether the clause is enforceable, and those decisions can be appealed.
Thus, to achieve true efficiency from arbitration, it is helpful to ensure all parties genuinely believe in arbitration from the outset.
Finally, a party cannot use an arbitration award to force collection. Instead, the prevailing party must obtain a judgment via a motion to confirm the award.
Arbitration provisions often state that awards shall be final and non-appealable, but this language does not bar a disaffected party from moving to vacate the arbitration award.
Furthermore, the result of a motion to confirm or vacate an award is appealable.
Within an arbitration provision, the parties can control the amount of time in which a final hearing must be held.
Absent such a provision, the amount of time between filing and a final hearing is likely four to eight months, depending on the nature of the dispute and the arbitrator.
Thus, getting a final hearing in arbitration can be much quicker than litigation.
However, for the same reasons it is not always less expensive to arbitrate, there are places where delay can inject itself into arbitration, making final resolution just as slow as litigation.
The cost savings of arbitration are most pronounced when both parties agree to and believe in arbitration, and when the anticipated issues in dispute are not likely capable of early disposition by a trial judge.
Forcing arbitration onto an unwilling party may have some benefits, but cost savings is not one of them. Even when both parties agree to arbitration, unexpected collateral litigation may arise if one party is unsatisfied with the award.
Is arbitration more predictable?
Arbitration avoids juries and allows the parties to pick the qualifications of the arbitrator to decide the case. In litigation, parties are unable to pick their judge or his or her qualifications.
In cases where the transaction is very technical or requires industry knowledge to understand, industry professionals can provide predictability and efficiency that lay people may not be able to achieve.
Nonetheless, relying on human judgment can always yield disagreeable results. In litigation, the judge reviews jury verdicts to ensure they comport with the weight of the evidence and the trial judge’s decisions can be reviewed on appeal.
Conversely, in the 11th Circuit, a trial judge may not vacate an arbitration award because of an error of law or a decision against the manifest weight of the evidence.
Instead, a trial judge can vacate an award only in four narrow instances:
• The award was a result of fraud, corruption, or undue means;
• There was a result of clear partiality or corruption of the arbitrators;
• The arbitrators were guilty of misconduct resulting in prejudice to a party; or
• The arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award was not made.
However, arbitrators can lead to predictability of a different sort. In arbitration, both parties hired and deemed appropriate the arbitrator.
Some arbitrators wish to please everyone and attempt to split the baby. While predictable, this result may not be rational.
If one party has the better case, arbitration may level the playing field — in the wrong direction. A judge, not hired by the parties, has no such temptation.
Moreover, in court, there is a well-defined body of law establishing what documents and testimony are allowed into evidence. Absent language in the arbitration provision adopting an evidence code, an arbitrator is typically free to accept hearsay, unauthenticated documents, and the like. This “evidence” can lead to unpredictable and irrational results.
Thus, arbitration does not necessarily tender more predictable results. Contracts involving sophisticated industry concepts more easily understood by industry professionals are likely better suited to arbitration.
Cases with simpler contract language may obtain more rational results with a trial judge supervised by appellate courts. Further, whatever benefit may exist to avoiding a jury may be achieved via a provision waiving the right to a jury trial.
Confidentiality concerns
Court records are generally public. Courts are ever increasing the difficulty of placing matters into the record under seal.
Quite simply, it is difficult to keep matters truly confidential in litigation. Conversely, arbitrations occur outside the public record.
Thus, arbitration remains more likely to protect privacy. If confidentiality is a key concern, counsel should also consider arbitration provisions requiring unreasoned awards to limit what would otherwise be in the public record in case of a dispute regarding vacating or confirming an award.
Conclusion
There are many benefits to arbitrating a dispute. It is not, however, a one-size-fits-all process.
Careful consideration ought to be given to the objectives to be gained from arbitration and whether foreseeable disputes that could arise are those for which arbitration will better service those objectives than a courtroom.