Arbitration vs. Litigation – Does It Really Make a Difference?

Short answer: Yes.

Long Answer: YES.  A significant difference. Not many businesses can afford to litigate “for the principal” anymore and perhaps as a result mandatory arbitration has become an increasingly popular dispute resolution clause in many contracts and other documents controlling how your business operates, such as your companies’ Operating Agreement.  Today these provisions appear in the most basic contracts however, parties often insert an arbitration provision without a true understanding of either the cost or effect an arbitration clause has on both a dispute and its outcome.  In some instances, arbitration can be a far less desirable option, take longer to reach resolution and even be a much more expensive alternative to the court system.

Contested cases in New Jersey’s Law Division (generally over $15,000) usually take 18-24 months to reach a trial.  Suits in New Jersey’s District Court (generally over $75,000) usually take 12-18 months to reach trial. Smaller disputes, (generally less than $15,000) can go to trial in the Special Civil Part of the New Jersey Court system in less than 6 months. The time frames for a dispute in Pennsylvania are not significantly different.

By comparison, it is not likely an arbitration will be scheduled more quickly than four months from the date the complaint is issued.  And such cases reaching a quick resolution require cooperation between the disputing parties, something usually not present if you are in a dispute.

The cost of administrating an arbitration, with AAA Arbitration, for example, let alone engaging arbitrators, often makes simple disputes much more expensive than litigation.  The filing fee to a court is usually a one-time, upfront cost in the range of $100-500.  By comparison, arbitration filing fees are $3,500 or more, with ongoing administrative costs, plus the cost of an arbitrator (or arbitrators) at a daily or hourly rate, in addition to the cost of your own lawyers and experts.

Those numbers add up quickly.

Arbitration involves a process much like a lawsuit where there is a complaint and a response.  Discovery, which involves an exchange of documents and depositions can be similar to that provided by the Court rules in litigation, or be limited by agreement among the parties and arbitrator(s).

The arbitration itself is usually held in an atmosphere more relaxed than a formal courtroom.  Instead, the parties meet in a conference room rather than a courtroom with the arbitrator(s) directing the procedure, typically in a format loosing following that of a trial.

In addition to the actual arbitration cost, the hidden cost can be the lack of discovery. In litigation, the parties use a variety of vehicles to obtain information during the discovery phase. Lawsuits are filed based upon allegations, which need to be proven by the party filing the lawsuit.  Similarly, allegations in an arbitration matter are presented in an arbitration demand.

Most arbitrations involve only the request for, and exchange of, documents and are conducted without depositions, a staple in most litigation and although expensive, truly the way to expose problems in your opponents’ case and to evaluate witnesses who will testify at trial. Without extensive prehearing discovery, parties can find themselves flying blind during the arbitration about what witnesses will say, what documents exist or what information they hold.

 

In complex matters, especially those that rely on information exclusively in the hands of the opposing or third parties, arbitration may not be the preferred method of dispute resolution.  Obviously, though, for simple matters, limiting the amount of discovery available to adversarial parties can limit your overall costs.

In either event, as you can see these are decisions best made on a case by case (no pun intended) basis.  If your dispute is less than $10,000 and your documents require AAA Arbitration, with three arbitrators, you’ve spent $10,000 likely before you are sitting at a table ready to resolve the dispute.

In addition, many arbitration provisions are silent on how the arbitration is conducted.  Such issues as the venue, the number of arbitrators, and the qualifications of the arbitrators are important considerations.  Conducting an arbitration in a remote location can be an expensive proposition.  As described previously, more painful may be a provision calling for multiple arbitrators.  Arbitrators are paid for their time to prepare for and preside over the matter by the day or hour.  The least expensive arbitrators usually charge $150 an hour, while the most expensive might charge $400-$500 an hour or more depending on their area of expertise.

And do not forget you will need to pay your lawyer.  Please.

Arbitrators are sometimes, but not always lawyers, and many are former judges.  While the parties can request arbitrators with certain qualifications, there are no guarantees about the training and experience of the person who will preside over your case.

A positive aspect of Arbitration is that it is usually binding.  This means the decision of the arbitrator(s) is final with only very limited appellate rights.  Court decisions can usually be appealed.  Arbitration should not be confused with mediation, which is a non-binding process in which a mediator attempts to bring the parties to a resolution of their dispute in an even more informal setting.

Arbitration is a viable alternative to litigation, however serious thought to the many above factors should be considered before drafting or signing documents containing an arbitration provision, rather than retaining your right to litigate disputes.

If you have controlling documents, or are presented with a contract containing an arbitration provision, feel free to contact Bergmann & Good for advice prior to making the best decision for both you and your business.

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