If you run a business, you’ve probably encountered arbitration clauses. These contractual provisions require parties to resolve disputes in private proceedings instead of court and are celebrated as a cost-effective alternative to in-court litigation. But arbitration might not always be a beneficial proposition for business disputes. Those who have arbitrated cases know the process features both advantages and disadvantages. Let’s take a closer look at three of the most critical issues businesses should consider when evaluating whether arbitration is right for them: efficiency, arbitrator selection, and privacy.
Driven by Discovery
Many choose arbitration because it promises a cheaper and faster resolution than court, but that’s not always the case. For example, an arbitration’s duration and cost are typically driven by discovery, the expensive and lengthy process through which parties exchange information.
Historically, arbitration discovery was typically limited to only the essentials, thereby reducing the cost and length of a case. Today, it’s more complicated. Many attorneys now complain that complex arbitration allows extensive discovery, thereby minimizing the claimed benefits.
Meanwhile, courts across the country have implemented “proportionality” requirements limiting discovery to the needs of each case, while judges in those proceedings are usually experienced at efficiently managing discovery. Arbitration has also started embracing procedures that can delay resolution, like pretrial motion practice. So, arbitration isn’t always faster and cheaper.
Parties who favor arbitration as a more cost-effective way of resolving business disputes would be wise to include reasonable provisions in their contracts to minimize costs and promote speed. Parties may, for example, agree to presumptive and reasonable limits on testimonies and discovery requests that can be exceeded only with arbitrator approval. They can also agree to reasonable time limits for an arbitration’s completion, thereby ensuring proceedings don’t go on endlessly.
Parties can also hire arbitration organizations with efficiency-oriented rules to administer proceedings. Those who fail to take such precautions may find arbitration’s promise of efficiency unfulfilled.
Choosing Carefully
Perhaps the key benefit of arbitration is the parties’ right to select the person—or people—who will resolve their dispute. This can be important in disputes that involve highly technical or specialized topics because the parties can select arbitrators from a specific industry or with specific knowledge.
They can also opt for a panel of three arbitrators, which allows for diverse skills to tackle complex problems. An arbitration focusing on accounting issues, for example, can feature a certified public accountant (CPA) and a business attorney. These choices should be memorialized via contract before a dispute arises.
The flexibility of choosing your decision-maker can, however, come at a cost. Parties pay for their arbitrator, which can make a proceeding costly if not properly managed. And parties are typically stuck with an arbitrator’s decision. Unlike court, where parties have appeal rights, there are ordinarily only narrow and limited ways to challenge an arbitrator’s decision.
This is a risk given that arbitrators, no matter how accomplished, don’t typically possess the experience of judges in weighing legal and factual issues. Therefore, you must choose an arbitrator carefully.
Public or Private
Businesses should also evaluate whether a dispute is suitable for the public eye. Arbitrations are private and—especially with a confidentiality agreement—are easier to keep from public consumption.
Court proceedings, on the other hand, are public affairs with a presumption of public access to documents and testimony in a lawsuit.
Bottom Line
In short, whether to arbitrate is a complicated decision that requires careful evaluation of several considerations.
Ryan Lirette is an attorney with Sheehan Phinney Bass & Green PA in Manchester, New Hampshire. He can be reached at rlirette@sheehan.com.