Corporate counsel drafting or reviewing contracts should consider whether it is in their best interest to include an arbitration clause. Similarly, parties faced with an existing dispute should think about whether to propose arbitration in place of full-scale litigation. While there are myriad benefits to arbitration, there can also be some drawbacks. Attorneys should be aware of the following strategic considerations.
A major difference between arbitration and litigation that is often particularly important to corporate entities relates to privacy.
As a general rule, court records are public. Of course, parties may address concerns about the release of sensitive information by agreeing to a confidentiality order or moving to seal certain filings or documents—but their opponents, or their judges, may push back. Moreover, the case itself will be listed on a public docket that is generally accessible.
By contrast, arbitration is private. This includes any documents turned over in discovery and later used during the hearing or motion practice, as well as any witness testimony during depositions or at the hearing. Perhaps more importantly, the existence of the arbitration itself is typically confidential.
Parties concerned about public scrutiny or the disclosure of commercially sensitive information often prefer arbitration for its confidentiality. That said, potential litigants who believe their goals would be served by some level of publicity may wish to proceed in court instead.
Perhaps the most-cited difference between arbitration and standard litigation is that arbitration tends to be more efficient than pursuing a claim in court. This arises in many ways. For instance, parties may forgo the significant motion practice that accompanies litigation. JAMS requires that a party seeking to make a dispositive motion first submit a brief letter explaining the merits of the motion; the arbitrator then decides whether to permit briefing. JAMS, Arbitration Discovery Protocols 8 (2010). Discovery, too, is often more limited in arbitration. As any litigator can tell you, discovery in fact-intensive court cases can take years and require massive document productions and numerous depositions—not to mention the inevitable discovery disputes that accompany these things. The breadth of discovery in litigation stems from civil rules that tend to permit discovery of any relevant information, with some notable exceptions for privilege and the like. By contrast, consider the American Arbitration Association’s rule for commercial arbitrations: “The arbitrator shall manage any necessary exchange of information among the parties with a view to achieving the efficient and economical resolution of the dispute, while at the same time promoting equality of treatment and safeguarding each party’s opportunity to fairly present its claim and defenses.” Am. Arbitration Ass’n (AAA), Commercial R-22(a) (emphasis added).
Potential plaintiffs who wish for their claims to be resolved sooner rather than later can benefit from these distinctions if they pursue arbitration rather than litigation—particularly in light of the case backlog that has burdened state and federal courts since the first COVID shutdowns. Potential defendants who are not in a hurry to reach a determination, on the other hand, may prefer the slower pace of traditional litigation.
And, of course, it is not only time that parties save by opting for arbitration. A faster process and narrower discovery can lead to significant savings in legal fees and costs. However, arbitration is not always cheaper than litigation. Parties to an arbitration must pay for the arbitrator’s time, which can add up—particularly in a complex or lengthy arbitration or when there is a panel of three arbitrators. And attorneys should review the relevant rules for cost-shifting provisions. For instance, in an AAA employment arbitration, the employer must pay 100 percent of the arbitrator’s fees.
Parties to an arbitration can play a larger part in determining how and when that arbitration will occur than they would in a court setting (where an assigned judge can hand down deadlines and sua sponte rulings). Arbitration parties usually play some role in choosing who their arbitrator(s) will be and whether there will be a single arbitrator or a panel. They also may agree upon a schedule and a location for hearings, which set of rules will apply to the proceeding, and whether to modify any of those rules.
Moreover, arbitration parties are not usually bound by the rules of evidence. This gives parties more leeway in determining what facts and evidence they will use to build their case. But a party concerned that its opponent will rely on prejudicial or otherwise objectionable evidence should consider whether litigation is a better option.
A party faced with an existing dispute should consider whether it has arguments or themes (for example, certain emotional appeals) that might be particularly appealing to a lay jury. If it does, arbitration—with an arbitrator who may well be a retired jurist—may not be the party’s best choice.
When it comes to litigation, a decision in the trial court is often not the end of the story; the unsuccessful party frequently appeals. On appeal, fact determinations made at the trial court level will be given some level of deference, but legal decisions by the trial court will be reviewed de novo. This standard can lend proceedings a level of unpredictability, even after a decision has been reached.
Arbitration awards face a much higher bar on appeal. The Federal Arbitration Act (FAA) provides a limited set of circumstances in which a federal court may vacate such an award. (Furthermore, there may be other relevant grounds for appealing an arbitration award under state law.) They FAA circumstances include (1) an award “procured by corruption, fraud, or undue means”; (2) arbitrator partiality or corruption; (3) arbitrator misconduct that prejudices a party; or (4) situations in which the arbitrators exceeded or imperfectly executed their powers to such an extent that “a mutual, final, and definite award upon the subject matter submitted was not made.” 9 U.S.C. § 10(a). In other words, mere error of law or fact—the typical grounds for appeal in court—is insufficient to vacate an arbitration award. However, if the parties’ arbitration agreement expressly allows parties to appeal, then they may appeal within their selected alternative dispute resolution provider (e.g., AAA or JAMS). Each entity has adopted appellate procedures that permit a broader review of the award than the FAA would allow in court.
A party whose dispute could include novel or complex issues of law—the type that are often the subject of appeals—may prefer to avoid arbitration in order to preserve access to a more robust appeals process with a more forgiving standard. On the other hand, a party who values the finality of a decision would be wise to consider arbitration.
Should a party have concerns about its opponent’s willingness to comply with an arbitrator’s award, that party should keep in mind that an arbitrator does not have any enforcement authority. If the arbitrator hands down a damages award and the losing party declines to pay it, the prevailing party will need to have the judgment confirmed in court before attempting to collect on it. Given the previously mentioned backlog facing courts, this could cause significant delay between a damages award and the victor’s collection of those damages.
International contracts have become increasingly common in recent years, and that trend shows no sign of stopping anytime soon. Arbitration of disputes arising under those contracts is prevalent, and for good reason. Arbitration can provide a neutral forum for parties concerned about the potential bias of a foreign court or jurisdiction. Institutions like the ICC International Court of Arbitration exist for this reason and offer proceedings in a variety of major languages.
Arbitration is a popular method of dispute resolution and will remain so for the foreseeable future. Counsel should consider arbitration’s unique benefits and drawbacks when drafting contracts that might include an arbitration clause. In choosing whether to proceed with arbitration or litigation, counsel should consider privacy, time, cost, flexibility, and finality concerns, among other factors.
