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ARBITRATION PROS AND CONS

Arbitration provisions are almost reflexively included in contracts, and parties do not consider the implications until a dispute arises.  Following are some pros and cons that should be given some thought before automatically agreeing to an arbitration provision:

  1. Cost.  Arbitration is often advocated based on the notion that the costs of litigation will be reduced should a dispute arise.  The cost savings, if there are any, are usually attributable to tighter restrictions on discovery and a more efficient trial.  With regard to discovery, arbitrators will sometimes limit discovery, although in my experience it is more often the case that the parties will be allowed any discovery they want.  With regard to the efficiency of the trial, arbitration will definitely save money over a trial, especially a jury trial.  The cost savings also need to be weighed against the cost for the arbitrator, which the parties will have to pay.
  2. Limited Appeals.  Most arbitration awards are not subject to appeal.  The lack of an opportunity to appeal will lead to quicker finality, but it also may lead to some “rough justice” if an error has been made by the arbitrator and it’s not subject to review.
  3. Discovery.  As noted, arbitration may cut down on the amount of discovery permitted in a given case.  But this can also be a double-edged sword.  Limiting discovery can sometimes prevent a party from discovering and presenting meritorious claims or defenses.
  4. Expeditious Trial.  Whether this is a concern will depend on where the suit would be filed.  For example, in Travis County, Texas, civil filings have been significantly reduced since Tort Reform in 2003 and the district court judges hear only civil cases.  It is rarely a problem to get a trial date in Travis County pretty much whenever you want it.  On the other hand, in some of the smaller counties in Texas, getting a trial date may be more difficult due to having to coordinate with a judge’s schedule and it becomes even more difficult to get a trial date where the district court judges hear criminal cases, as those must be heard first.  In the latter case, arbitration will almost certainly lead to a more expeditious resolution of disputes.
  5. More Predictable Results.  Many people feel that arbitration will lead to more consistent results and not subject the parties to a “runaway jury.”  This may have been a concern in the past, but should not be as much of a concern.  The seemingly relentless campaign from insurance companies and politicians about “frivolous lawsuits” has, in my opinion, rendered most juries somewhat skeptical of plaintiffs and therefore less likely to award excessive damages.  Punitive damage awards are also fairly restricted both in availability and the amounts than can be awarded under law.  On the other hand, I believe a single decision-maker, whether it is an arbitrator or a judge, is more likely “split-the-baby” and not award full relief to either party.  There may also be inherent biases in favor of a large corporation over an individual due to the repeat business the corporation provides in contrast to the consumer or employee that will likely be before the arbitrator a single time.
  6. Misinformed Decision-Maker.  Arbitration permits the parties to choose their arbitrator; in contrast, the parties do not get to choose their judges.  If the subject-matter is highly technical, there are definite advantages to choosing an arbitrator familiar with the subject of the dispute, both in understanding the subject matter and expediting the process as there is a knowledge base on which to draw that may not be available in court.
  7. Privacy.  Generally, arbitrations are private and not available for viewing by the public.  This can be particularly advantageous in protecting trade secrets or a company’s reputation.  On the other hand, plaintiffs sometimes sue in order to shed light on an issue of public concern, which would not be vindicated in a private arbitration.  Note, however, that while arbitrations may be private, there is not necessarily a requirement of confidentiality on the parties unless it is specifically set out in the arbitration agreement.

While parties rarely enter into contracts with the expectation of failure, it is nonetheless important to actually consider whether arbitration would be beneficial in resolving disputes should any arise.  If arbitration is included, the advantages or disadvantages of particular provisions of the arbitration agreement (e.g., limits of discovery, confidentiality, etc.) should also be considered.

For more information, contact John Jacks.