Court v. Arbitration: Why You May Want to Rethink Putting a Mandatory Arbitration Clause in Your Contracts

Author: Blake Marvis, Emerge Litigation Attorney

Rarely do litigators these days come across a contract that does not contain an alternative dispute resolution provision, often in the form of a mandatory arbitration clause.

The conventional thinking behind arbitration clauses is simple: cost-saving.  Litigating leads to high legal fees and drawn-out court proceedings – it’s typical that just the initial discovery phase can take months or longer.  Arbitration, therefore, seemed like a good solution that saved parties money and lead to quicker results.

But has this reasoning proven correct in the long run?  Maybe not in all cases.  Ultimately, business owners may want to think twice about including mandatory arbitration clauses in their contracts.

The litigation group at Emerge regularly handles cases in arbitration and state and federal court. Over the years it’s become more apparent that in a variety of situations, court may be preferrable to binding arbitration.  However, that depends greatly on the business owner’s circumstances. Here’s an overview of the main questions business owners should consider when determining whether arbitration is preferrable to court.

1. Does arbitration really make more sense from a cost perspective?

While historically arbitration has been fairly cost-effective compared to court, this is changing.  For example, fees that arbitrators charge are increasing.  Whereas the parties to a court proceeding do not pay the judge or jury.  This is true regardless of the case’s resolution –settlement or trial – or how long the proceedings last.

However, arbitrators charge for their services, often at high hourly rates, especially in non-court-mandated arbitration.  Arbitrators also typically require initial retainers before they take on a case, which may be nonrefundable, even when the case is quickly resolved.  Such retainers may be in the tens of thousands of dollars, especially when the arbitrator’s expertise is highly specialized.  So, whether to arbitrate may depend on a comparison between the benefits and costs of having a decisionmaker with certain expertise and the going rate for an arbitrator in the applicable field.

2. Is a speedy resolution worth the drawbacks?

Generally, arbitration is faster than going to court.  But the speed comes at certain costs.  For example, arbitration typically has fewer procedural rules than court proceedings.  But fewer rules is not always a good thing. An arbitrator, for example, may be less likely to join parties to the proceedings that are not explicitly bound by an arbitration clause than a court.

Similarly, while lacking the formal rules of discovery often leads to a faster outcome, some arbitration services have narrower rules regarding the discoverability of certain documents, which could limit the scope of what parties can obtain from each other.  Arbitrators may also limit depositions and other discovery mechanisms, which can hamstring a party’s ability to support its arguments.

Conversely, evidence rules in court proceedings often lead a judge to exclude evidence that an arbitrator may not exclude. This can be a benefit or detriment in arbitration depending on whether the evidence allowed supports or undermines a party’s position.

In short, the above, and other costs of arbitration should be weighed against the anticipated speedier resolution, when determining whether to opt for arbitration or court.

3. What about the end goal, obtaining an enforceable judgment?

Parties to a dispute often express surprise that an enforceable arbitration judgment must be filed and confirmed by the relevant court before the prevailing party may collect.  This requires filing the necessary documents, paying a filing fee, often serving the judgment on the losing party, and waiting for the court to sign an order.  On the other hand, when you get a judgment in court, you can begin efforts to collect right away.

A judgment’s appealability, or lack thereof, also may affect a party’s decision whether to arbitrate.  The general lack of appealability of an arbitrated judgment poses the risk for all parties that an adverse ruling may be permanent and unalterable.  Typically, even if an arbitrator makes a mistake of law or fact, the decision is not appealable. On the other hand, in court, each party has a much broader right to appeal certain decisions made during litigation, including the judgment.

Overall, despite the increasing costs of arbitration, there’s still no one-size-fits-all in terms of court v. arbitration.  Business owners should discuss the benefits and drawbacks of court or arbitration for their specific needs and goals with experienced business and litigation attorneys prior to making their decision.

Emerge Law Group has an experienced team of business and litigation attorneys who can help advise you on these issues.