Arbitration vs. Litigation: What's the Difference?

It's more than just whether you want to go to court

Lawyer meeting with client in office
•••

Maskot / Getty Images

Arbitration and litigation are both formal methods of settling business disputes. They differ in who hears the dispute, how the process works, and whether the decision can be appealed. This article discusses the main differences between these two methods dispute resolution processes.

Key Takeaways

  • Arbitration and litigation are different ways to settle business disputes.
  • Arbitration processes are overseen by an arbitrator, while litigation is under control of a judge.
  • The decision of a judge can be appealed, while the decision of an arbitrator is usually binding on both parties and has limited appeal rights.
  • Mandatory arbitration clauses are common in many business contracts.

What's the Difference Between Arbitration and Litigation?

Litigation is an ancient process that involves determining issues through a court with a judge or jury.

Arbitration, on the other hand, involves two parties in a dispute who agree to work with a neutral third party in an attempt to resolve the dispute. Arbitration is used in place of civil litigation involving two parties.

Arbitration vs. Litigation Compared
Arbitration Litigation
Type of Proceeding Private - between the two parties Public - in a courtroom
Evidence allowed Limited evidentiary process Rules of evidence allowed
Jurisdiction Yes, depending on type of case No jurisdiction involved
How arbitrator/judge selected Parties select arbitrator Court appoints judge - parties have limited input
Appeal available Usually binding; no appeal possible Appeal possible
Speed of process; waiting time before start As soon as arbitrator selected; short Must wait for the case to be scheduled; long
Costs Fee for the arbitrator, attorneys Court costs, attorney fees
Use of attorneys At the discretion of parties; limited Extensive use of attorneys; essential

Type of Proceeding

The arbitration process is private, between the two parties, while litigation is a formal process conducted in a public courtroom.

The American Arbitration Association and the International Centre for Dispute Resolution have a process for virtual hearings, both in the U.S. and for international disputes. Since the beginning of the COVID pandemic, many civil litigation cases have been conducted virtually.

Evidence Allowed

In a court case, the court must follow the federal rules of evidence. The arbitration process has a limited evidence process, meaning that the federal rules of evidence do not apply, and the arbitrator decides what evidence is allowed. Arbitrators must comply with the procedural rules set by FINRA (a financial regulatory organization).

Jurisdiction

Civil trials are subject to jurisdiction (where a case must be tried), depending on the subject matter (bankruptcy, for example) or on the location of the parties. For example, a business bankruptcy comes before a bankruptcy court. Jurisdiction doesn't apply to arbitration cases.

Selection of Arbitrator/Judge

In litigation, the judge is appointed, and the parties have little or no say in the selection. The parties may have some say in whether a case is heard by a judge or a jury. In arbitration, the two parties usually decide together on an arbitrator, unless the decision is specified in the arbitration clause of a contract.

Final Outcome and Appeal Availability

The decision of a judge is binding on the parties to a lawsuit, but the losing party may appeal to a higher court. The decision of an arbitrator is considered binding on both parties, and there's no built-in appeal process. However, some states allow a limited ability to contest an award.

Speed of Process

The arbitration process is fairly quick. Once an arbitrator is selected, the case can be heard immediately. In civil litigation, on the other hand, a case must wait until the court has time to hear it; this can mean many months, even years before the case is heard.

Time is Money in Resolving Disputes

A 2017 report by the American Arbitration Association showed that resolution times in health care cases were resolved in a shorter time with arbitration than with U.S. District Courts.

Cost of the Process

The costs for the arbitration process are limited to the fee of the arbitrator (depending on the size of the claim, expertise of the arbitrator, and expenses), and attorney fees. You may also have to pay the cost of the location for the arbitration.

Costs for litigation include attorney fees, pre-trial costs for depositions and interrogatories, records searches, and court costs, which can be very high.

Use of Attorneys

Attorneys may represent the parties in an arbitration, but their role is limited. In civil litigation, attorneys spend much time gathering evidence, making motions, and presenting their cases.

It's up to you whether you think you need an attorney for arbitration, and it depends on the situation. If you handle your own arbitration it's called "pro se," meaning "by yourself." The American Arbitration Association says that while attorneys aren't required, "arbitration is a final, legally-binding process that may impact a party’s rights" so the parties involved may want to consider consulting an attorney.

Mandatory Arbitration

Many contracts have a mandatory arbitration clause, which states that all disputes must be handled by arbitration. In most of these contracts, litigation is specifically ruled out as a possibility. Arbitration clauses are common in real estate (landlord/tenant) contracts and in employment contracts

Some contracts which include mandatory arbitration also include a provision denying the right to form a class action lawsuit.

Which Is Best for Your Business?

Since arbitration is mandatory in many business-to-business disputes, the choice may be out of your hands. If you have the choice, consider all the factors in determining whether to go to arbitration in a specific case.

In many cases, arbitration is faster and less costly than litigation. with an average time between start of the case and the final award taking several months instead of years. Since attorney fees are the biggest cost of litigation, more limited use of attorneys in arbitration saves money for the two parties.

Another benefit of arbitration is its flexibility of scheduling and procedures for the convenience of the parties. The more informal atmosphere and privacy can also reduce stress. Finally, having your business dispute settled quickly and avoiding lengthy and expensive appeals is critical to most businesses.

On the other hand, litigation might be the better alternative. Sometimes a dispute is best settled in a public courtroom. In other situations, litigation might preferable if the ability to appeal is important, if there are concerns about finding a competent arbitrator who won't be too timid, or if there is a need to resolve legal principles.

Each small business situation is different, and you may have a situation that requires one over the other. Talk to your attorney before you make a decision on arbitration vs. litigation.

Frequently Asked Questions (FAQs)

What is binding arbitration?

Arbitration is usually binding; when the two parties agree to submit their dispute to the arbitration process, they agree to abide by the decision of the arbitrator.

In binding arbitration, the parties usually have no appeal option, unless an appeal has been included in an arbitration clause or contract. Some arbitration decisions may be reviewed by a judge and the decision may be vacated (removed) if it can be proved hat the arbitrator was biased.

Some arbitration may be non-binding, depending on contract language or the situation.

What's the difference between mediation and arbitration?

Arbitration and mediation are the two types of alternate dispute resolution processes, used as alternatives to civil litigation.

Mediation is an informal voluntary process where the two parties get together with a trained mediator to see if they can work out their differences. The mediator can be selected by the parties or by a judge, and this person doesn't impose an agreement on the parties. Any agreement between the two parties isn't binding, and the dispute can continue to court if the parties can't agree.

Arbitration is a more formal process, in which the two sides agree to take their dispute to a trained arbitration professional as an alternative to litigation. As with litigation, the two parties present their cases, and the arbitrator makes a decision, which is usually binding on the parties.

How long does arbitration take?

The arbitration process is shorter than the litigation process. Once the decision is made to go to arbitration, the parties select and hire an arbitrator, find a location, and the case can begin. In contrast to litigation, arbitration doesn't involve complicated pre-trial processes like depositions, jury selection, document authentication, and qualification of experts.

The American Bar Association says that the average time for an arbitration case from start to the final award is about seven months, while the average time for civil litigation ranges from 23 months to 30 months, depending on how busy the court is.

Article Sources

  1. Cornell Law School, Legal Information Institute. "Alternative Dispute Resolution." Accessed Oct. 26, 2021.

  2. U.S. Courts. "Civil Cases." Accessed Oct. 26, 2021.

  3. United States Courts. "As the Pandemic Lingers, Courts Lean into Virtual Technology." Accessed Oct. 26, 2021.

  4. Nevada Bar Association. "A Brief Overview of the Use of Evidence in Arbitration." Accessed Oct. 26, 2021.

  5. Florida Bar Journal. "Appeals Before and After Arbitration State and Federal Issues." Accessed Oct. 26, 2021.

  6. American Arbitration Association. "Resolution Times in Healthcare Cases." Accessed Oct. 26, 2021.

  7. American Bar Association. "Arbitration." Accessed Oct. 26, 2021.

  8. American Arbitration Association. "Pro Se / Self-Represented Arbitration." Accessed Oct. 26, 2021.

  9. American Arbitration Association. "Measuring the Costs of Delays in Dispute Resolution." Accessed Oct. 26, 2021.

  10. American Bar Association. "Benefits of Arbitration for Commercial Disputes." Accessed Oct. 26, 2021.

  11. American Bar Association. "The Conundrum of the Arbitration vs. Litigation Decision." Accessed Oct. 26, 2021.