The Pitfalls of Business Arbitration

Business arbitration is a legal mechanism for the private resolution of disputes, without a formal trial.  Arbitrations are decided by a neutral arbitrator (or panel of arbitrators) chosen by the parties, rather than by a state or federal court.  Compared to traditional trials, arbitration can be completed less expensively and in less time.  And arbitration is usually confidential, as opposed to trials, which are public.

But business arbitration may present disadvantages.  For example, arbitration is not always voluntary.  Arbitration agreements that may have been signed in the past under very different circumstances are almost always enforceable.  If there is an arbitration agreement, either party can force the other side to arbitration unless both sides agree not to enforce the prior arbitration clause. 

Arbitration isn’t always cheaper than a trial.  While arbitration is meant to be an efficient, streamlined way of deciding disputes, that’s true only if the arbitration clause is tightly drafted.  Depending on the arbitration agreement, all of the costs of the arbitration are imposed either equally or against the losing party.  The parties must pay for one or three arbitrators; even one costs more than a judge.  The parties also pay for administrative services.  These costs can be prohibitive for small disputes.  Discovery can be just as expensive as formal litigation, depending upon the involvement of the arbitrator and the permitted scope of discovery fights.

Arbitrators aren’t always qualified.  Selecting the best arbitrator for your circumstances requires careful consideration of cost, demeanor, conflicts of interest with the other attorney and their client, and the arbitrator’s experience.  Sometimes specific experience or industry knowledge is important.  Investigate whether your arbitrator is capable, able to manage cases efficiently, and willing to rule decisively.

Arbitration might not be faster than a trial.  It’s not always true that arbitration moves more quickly than a court case.  Though arbitration intentionally does away with some rules of civil procedure and evidence in the interests of efficiency, it can still be slow and expensive.  Properly managed, arbitration can provide flexibility to fashion the procedure and discovery to the circumstances of the dispute.  This depends on an arbitrator who is willing to push the case to a fair and efficient resolution rather than permitting the parties to fight over discovery.  As every manager knows, time is money.

Arbitration can’t be appealed.  Unless the arbitration agreement provides otherwise, an arbitration award is final. Courts will not consider arbitration appeals unless they fit within very narrow exceptions.

Plan ahead.  Consult your lawyer before you sign an arbitration agreement.  A properly drafted arbitration agreement can help you to keep disputes manageable, with narrowly crafted, appropriate discovery.  Customize any contractual arbitration procedure to suit your business needs.  Avoid boilerplate arbitration provisions from the Internet.

Tom Campbell