Arbitration – Is It Really the Best Option?

Weary of the time and expense associated with traditional litigation, many companies have turned to alternative dispute resolution (or “ADR”) methods to resolve disputes. Binding arbitration is among the most common ADR methods and, in many cases, the best option available. On a basic level, binding arbitration means that the parties present their case to an agreed upon arbitrator, or arbitration panel made up of several (typically 3) arbitrators. The decision of the arbitrator(s) is binding and final, and there is no appeal.

Binding arbitration is typically the result of a contractual agreement between the parties providing that any disputes between the parties will be resolved in binding arbitration. Under the Federal Arbitration Act (“FAA”) and its state law counterparts, such agreements are presumptively valid and enforceable. Generally speaking, if you sign a contract that contains an arbitration provision, you will be bound by that agreement and forced to resolve any disputes through arbitration. In other words, by entering into an agreement containing an arbitration provision, you are waiving your right to address any disputes through traditional litigation in a court of law.

The most commonly cited benefits of binding arbitration mirror the most commonly cited negatives associated with litigation: faster resolution and reduced expense. There is no denying that traditional litigation takes too long and is very expensive. Arbitration is substantially faster than litigation in the overwhelming majority of cases (often less than 6 months with no mechanism for appeal compared to 1.5 to 2 years through trial in traditional litigation, with the possibility of several additional years if the case goes to appeal). Arbitration can also be substantially less expensive than traditional litigation, although not in every case. Depending on the arbitration agreement and the rules of the organization conducting the arbitration, discovery is likely to be substantially limited, which significantly reduces both the cost and invasiveness of traditional litigation.

Despite the benefits of arbitration, there are still many cases in which it is not the best option. First, arbitration of claims involving larger amounts often requires payment of substantial upfront fees. While court fees are typically a flat fee of a few hundred dollars, a large dollar case in front of AAA, for example, can require the payment of $15,000 – $20,000 in administrative fees to AAA prior to any award by the arbitrator. Moreover, the benefits associated with limited discovery are only beneficial in cases in which the parties are able to obtain the necessary evidence to prove their case. Discovery is often considered critical in litigation, and the significant limitations on discovery in arbitration may prevent a party from obtaining critical evidence. Finally, in our experience, there are fewer opportunities for dispositive motions, and dispositive motions are less likely to be granted, in the arbitration context. In those circumstances in which a client is likely to have strong legal defenses and a reasonable probability of success on a dispositive motion, the client may well be better off in traditional litigation with an opportunity for appeal if the decision at the trial court level goes the other way.

The attorneys at Dioguardi Flynn have extensive experience in both arbitration and litigation, and can assist clients in determining which approach is in their best interests in their specific situation.

Tags: Litigation, Todd Williams