January 01, 2015

Why Arbitration Beats Litigation for Commercial Disputes

Business clients, as a general rule, are cost conscious. They need results quickly. Arbitration generally affords these clients the best of all possible worlds; the key is the control the client can exercise over the entire process. This control keeps costs down and usually yields faster results. The discussion below points out the advantages of using the arbitral process in commercial disputes.

More Control

Parties to an arbitration proceeding exert more control over the outcome than parties to a court litigation. By properly drafting a comprehensive arbitration provision into their contract at the outset of the relationship, they are able to design the arbitral process to accommodate their particular needs in the event of a dispute. Parties are able to specify the nature and scope of discovery, the conduct of hearing, the length of time for the process, and the pre-screening of arbitrators, among other facets of the arbitration.

Indeed, the inclusion of a properly crafted arbitration provision in a contract or agreement will generally ensure an arbitrator who is skilled and who has an expertise in a particular area of the law can be chosen by the parties to decide any dispute that may arise. In co-selecting an arbitrator, parties have the ability to vet a candidate for qualities such as subject-matter expertise, reputation for competence, temperament, number of years of experience, number of arbitrations, availability, commitment, and ability to conduct efficient, cost-effective arbitration. The parties can even provide for a panel of multiple arbitrators to hear complex and/or high-dollar disputes.

Contrast this process with a typical courtroom litigation, in which parties have little to no control over the judge to whom a case may randomly be assigned or, as a defendant, even the court in which it may be sued. And, worse, almost every judge has his or her own rules. In federal court, cases also are assigned to magistrates, and they, too, have their own rules with which to contend. Litigants must cope with a veritable forest of rules that differ from case to case, creating even more uncertainty and lack of control.

Quicker Results

Arbitration generally provides a speedier sense of justice to the parties than does litigation. The court system is typically backlogged with cases. The total time elapsed in an arbitration, measured from the filing of an arbitration demand to the rendering of a final award, is much shorter than the total time in a litigation, measured from the filing of a complaint to the date a verdict is handed down in a civil trial. This can be critical in commercial matters where the parties may have ongoing business relationships or need to end relationships during the course of the dispute, or where the parties cannot delay in making basic business decisions because of the ongoing dispute. Parties should be aware, however, of the possibility (though infrequent) that arbitration can be used by a party to extend a litigation.

Less Expense

Traditionally, attorney fees and expenses are the most significant costs incurred by the parties during the course of litigation. These very same costs are generally minimized in arbitration because an arbitration is almost always completed in far less time than a court case and typically involves less discovery. Court cases require more lawyer time and more expense for preparation. Although there is a cost incurred by the administering institution for the arbitration and a cost to employ the arbitrator, these costs are generally far less than the attorney fees associated with litigation in court. And in those cases where a jury is involved, the court process becomes even more attenuated and costly.

In addition, there are added expenses in court litigation. For example, in court proceedings, parties are typically faced with evidentiary issues, voir dire, jury charges, motion practice, proposed findings of fact, authentication of document issues, qualification of experts, multiple witnesses for the same point and appeals, redirect and cross-examinations, extensive discussion over objections, post-trial and pre-memorandums of law, the judge’s need to attend to other matters during the course of the trial, and more. All of these are absent or far more limited in arbitration.

Increased Flexibility

Compared to litigation, arbitration is a far more flexible process that can be changed or modified to suit the needs of the parties. For example, in an arbitration parties have the ability to

  • mutually select a location for the hearing that will minimize costs;
  • take witnesses out of order or interrupting a witness to accommodate individual needs;
  • continue a hearing after normal business hours (i.e., during the night or over the weekend) to complete a witness or finish the hearing;
  • take testimony of distant witnesses by videoconference or telephone;
  • “hot tub” or organize testimony so all expert witnesses on one topic testify directly after one another or all at the same time; and
  • use written witness statements instead of oral testimony.

And the above list is by no means exhaustive. All of this can serve to save time and limit expense—goals of almost every client.

In addition, arbitration overall can be less formal and occur in a less adversarial setting, minimizing the stress on what can be an ongoing business relationship between the parties to a commercial dispute.

More Manageable Discovery

Litigation is subject to broad discovery, including both document discovery and depositions, under either the Federal Rules of Civil Procedure or parallel state court rules. This is a very expensive part of trial preparation and can be very burdensome to the parties. In contrast, in arbitration, document discovery is usually far more limited, and frequently there are no depositions or they are severely limited in number. Likewise, in litigation, if there are disputes regarding discovery, motion practice is far more common; those same disputes occur far less frequently and typically are discouraged in arbitration—and when they do occur in an arbitration, the process to decide the discovery dispute is more streamlined.

Heightened Confidentiality

Confidentiality is often important to the parties involved in a commercial dispute, particularly big corporations that may be involved in disputes over intellectual property and trade secrets. Arbitration hearings are held in private and attended only by designated parties and their lawyers. Litigation proceedings are held in court and are open to the public. Parties also can agree that an arbitration proceeding will be kept confidential, whereas requests in court to seal the record are infrequently granted. Indeed, most arbitral institutions have specific rules regarding the confidentiality of proceedings and awards.

Greater Finality and Enforceability

Arbitration is a voluntarily binding process that provides finality for the dispute between the parties; lengthy, expensive appeals are not available under either the Federal Arbitration Act (FAA) or state arbitration statutes. Both the FAA and state statutes severely limit a court’s ability to vacate arbitration awards except on narrow grounds (e.g., corruption, fraud, or evident partiality), all of which are difficult to prove and rarely succeed given the cases decided by the courts to date. This can be the most important consideration for many corporations seeking a quick and definitive resolution of a commercial dispute.

In addition, in disputes reaching across multiple jurisdictions, the parties will want to ensure that the final judgment rendered is enforceable against assets regardless of location. A court order from one jurisdiction may not be easily enforceable in another, whereas an award from an arbitral tribunal rendered in one contracting state to the 1958 New York Convention will generally be enforceable in another contracting state.

Conclusion

When used correctly, pursuant to properly drafted provisions or agreements, arbitration is far superior to court litigation and yields the precise benefits that are most important to business clients, reducing their expenses and lost time while increasing their control over the process.

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