As a litigator, my clients often ask me whether litigation or arbitration is faster and more cost-efficient for resolving a dispute and whether or not they should include an arbitration provision or other dispute resolution provision in their contract.
The nature of your business, the likelihood (and frequency) that you may face litigation, and the types of potential litigation that could arise all make a big difference in how I answer those questions.
For example, If your business deals in goods and services and has a straightforward contract, it will most likely face litigation over a past-due account. Such disputes, in my experience, are most efficiently and cost-effectively pursued in state courts.
Businesses also typically want to avoid having their names appear in news articles about lawsuits, making the privacy customarily associated with arbitration very appealing.
Finally, because parties waive the right to a jury when choosing arbitration, another layer is added to the decision-making process regarding what kind of dispute resolution provision to include in your contract.
There are four prevailing myths about arbitration vs. litigation.
- All arbitrations are the same. They are not. Some arbitration provisions provide that the parties will use the rules of civil procedure of the jurisdiction they are in. Others will provide for arbitration under the American Arbitration Association rules, which differ whether the dispute falls under the commercial rules, the employment rules, the construction rules, or something else. It is important to know what the rules say about things like the timing of the arbitration, permitted discovery, and how or whether the parties will share the upfront costs of arbitration before committing to use them in a contract.
- Arbitration is faster. Arbitration can be faster, but that is not always the case. Timing can depend on the rules applied, as well as the flexibility of the arbitrator and the parties. Also, depending on the type of case, faster may not be a good thing. In cases where a lot of discovery is warranted (and permitted under the applicable rules), more time can be beneficial.
- Arbitration is less expensive. In my experience, this is untrue. In arbitration, you pay for the cost of your attorney plus the cost of the arbitrator, generally split between both parties. Employment cases often shift the cost of arbitration to the employer. Still, parties typically end up paying for the equivalent of one and a half law firms (i.e., their own counsel plus ½ the cost of the arbitrator). Highly contentious cases drive those costs up quickly as the arbitrator is regularly called on to determine disputes.
- Arbitration is private. Arbitration is intended to and typically presumed to be confidential. But as we all are learning, in this digital age, more and more information is becoming publicly available. Additionally, some cases involve third parties who are not bound by an arbitration confidentiality provision, so there are risks of information getting out that way as well. The point is that arbitration does not guarantee that your dispute will fly below the public radar.
As a general rule, I advise my clients to do three things to protect themselves:
- Have a written contract.
- Include a written dispute resolution provision in the contract. Not all contracts for a single business have to have the same dispute resolution provision. For example, a company may elect to arbitrate employment disputes but have disputes pertaining to its contracts for the sale of goods resolved in state or federal court.
- Talk to a litigator about what makes the most sense for your business. Again, different aspects of a single business may warrant different dispute resolution provisions. Often, corporate counsel drafts these provisions instead of the litigators who actually employ them. However, I always recommend having a litigator advise on the pros and cons of different dispute resolutions in different types of contracts. No one likes to ask these what-if questions, but taking the time to think through these scenarios on the front end may save lots of time and money when actual disputes arise.
The bottom line is that you have options in choosing which dispute resolution provision is best for your business. Consult with counsel about the nature of your business, and consider the time, money, and privacy considerations of each. Have counsel review your standard contracts to ensure they still work for your business as it grows and changes. If you have questions about your contracts or what type of dispute resolution provision makes the most sense, please contact me or another member of our litigation team.
