The peaceful settlement of disputes and the prevention of their escalation are worthy goals for any two parties in a business relationship. When a commercial contract is involved, there are generally two ways to formally settle a dispute: arbitration or litigation. If the arbitration vs litigation question comes up with your small business clients, use this quick guide to show them their options.
In simple terms, arbitration is the out-of-court resolution of a disagreement between two commercial parties decided by an impartial third party, the arbitrator. By TV standards, arbitration may seem like the less-sexy cousin of litigation. No judge, no jury, no courtroom. But its faster resolution, lower cost, and binding decision often make arbitration the preferred choice for your small business clients.
Arbitration provisions are often written into commercial contracts, stating that in the event of a conflict, the parties will use arbitration to resolve their issue. These clauses can be clear-cut: both parties pledge that they will resolve disputes in front of an arbitrator and follow its rules. More robust clauses include bespoke rules that define the time frame, types of damages to be awarded, limits on discovery, and appellate rights. The American Arbitration Association provides sample clauses you can adjust and add to your clients’ contracts.
Once the parties decide to go to arbitration, the process moves swiftly. This is one of the key benefits of arbitration vs litigation. A dispute is filed with an arbitration body, the parties mutually decide on an arbitrator, and the hearing can begin. While there’s a possibility of a summary judgment, a hearing is usually held.
Speed to resolution is a prime reason some small businesses build arbitration into their contracts. American Bar Association research suggests that average arbitration cases take about seven months, while average litigation can take from 23 – 30 months depending on the court schedule.
Your clients are continually looking for ways to save money. When cost is a factor in arbitration vs litigation, arbitration wins. Arbitration means limited discovery and the lack of pre-trial depositions, documentation authentication, and the qualification of experts. Your experience and knowledge of the arbitration process can help set you apart from the competition and keep you top of mind when your client enters into a dispute.
Because arbitration is not held in front of a judge in a courtroom, the process can be simpler and more convenient for the parties involved. The hearing is held in a private location, so wrangling a court calendar is not an issue. And because jurisdiction doesn’t apply, location can be a simpler logistical component of the process. An arbitrator is assigned, often from a mutually agreed upon arbitration group.
Since the parties in arbitration are often business associates, maintaining a cooperative atmosphere is important. The parties are encouraged to actively participate in the resolution, and sometimes help structure the decision itself. Unlike litigation, the arbitration process fosters a more amicable agreement with less anguish and hostility. If the two parties want to continue to do business together, the many complicating factors of litigation can make it uncomfortable to do so.
A clear benefit of arbitration is that the hearing takes place privately. There’s no public court record filed. This helps your small business clients protect their trade secrets or other intellectual property that may be foundational to their businesses. No third parties (including press or competitors) are allowed in the hearing. But while privacy is a component of arbitration, confidentiality is not guaranteed. Confidentiality is determined by the laws at the location of the arbitration and the rules outlined in the business contract.
An arbitrator’s decision can be generally enforced in any US court. While a binding decision helps both parties move forward, if your client feels they didn’t get an adequate resolution, there’s little they can do. Without showing bias or fraud on the part of the arbitrator, their decision is generally considered final.
With all the factors pointing toward arbitration as the best dispute resolution option for small businesses, why do parties still go to court? Who wins in the arbitration vs litigation question when litigation is the answer?
If one of the parties is unwilling to go to arbitration, or if it has not been written into the contract, litigation is the solution. It is a centuries-old resolution method: it’s in a courtroom, in front of a judge, and possibly a jury. It can be acrimonious, intrusive, and expensive, but it’s an effective way to end a dispute.
The primary comparative benefit of litigation is that the decision can be challenged in an appellate review. In arbitration, the decision is generally binding and the parties have little recourse to challenge a judgment; in litigation, there are multiple levels of appeal (which can be both a reassurance and a cost-prohibitive provision.)
Most often litigation settles without going to trial. It’s sometimes said that a bad settlement is better than a good lawsuit. Since you can’t guarantee your client a litigation outcome, settling a case may be the best and most efficient way to resolve the dispute.
Arbitration vs Litigation Summary
In arbitration vs litigation, neither option is a pleasant endeavor. It is a conflict, after all, that brought the parties to a point of formal resolution. But having no way to decide a disagreement is worse. Your clients deserve the most thoughtful, effective way to resolve their business disputes, and you can provide the insight to guide them through the process.
Speed to Resolution
Arbitration: Months; as soon as an arbitrator is selected. Litigation: Years; dependent on discovery and court schedule.
Arbitration: Comparatively moderate: location fees, arbitrator’s fees, attorneys’ fees. Litigation: Expensive: court costs and extensive attorneys’ fees.
Arbitration: Between the two parties. Litigation: In a public courtroom.
Arbitration: Comparatively cooperative. Litigation: Antagonistic.
Arbitration: Decisions are binding. Litigation: Open to levels of appellate review.
To learn more about different ways to settle disputes, read the Problems & benefits of using alternative dispute resolution | Thomson Reuters.