You may have encountered an arbitration clause in a contract and wondered what it is and whether you should be happy or upset about this clause.
Or a colleague may have suggested to you that you include an arbitration clause in a contract, and you are wondering why this would benefit you.
Virtual Arbitration Services Available
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.
Differences Between Arbitration and Litigation
Litigation is an ancient process that involves determining issues through a court, with a judge or jury. The type of court is decided by the type of dispute, based on jurisdiction. In most civil cases, jurisdiction is based on where the lawsuit originated.
Arbitration, on the other hand, involves two parties in a dispute who agree to work with a disinterested third party in an attempt to resolve the dispute. In arbitration, there may be one or more arbitrators who hear both sides of the issue and who make a decision. Jurisdiction isn't an issue, although the arbitration is chosen based on expertise.
Here are some differences between litigation and arbitration:
The arbitration process is private, between the two parties and informal, while litigation is a formal process conducted in a public courtroom.
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.
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.
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.
Time is Money in Resolving Disputes
A 2017 report by the American Arbitration Association showed that resolution times in healthcare cases were resolved in a shorter time with arbitration than with U.S. District Courts.
Use of Attorneys
Attorneys may represent the parties in an arbitration, but their role is limited; in civil litigation (one person against another), 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:
While parties are not required to have an attorney to participate in arbitration, arbitration is a final, legally-binding process that may impact a party’s rights. As such, parties may want to consider consulting an attorney.
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.
Final Outcome and Availability of Appeal
The opinion of a judge in a lawsuit is usually considered binding; that is, the two parties must abide by it. Litigation allows multiple appeals at various levels.
The decision of an arbitrator can be either binding or non-binding, depending on contract language or the situation. In binding arbitration, the parties usually have no appeal option, unless an appeal has been included in an arbitration clause. Some arbitration decisions may be reviewed by a judge and the decision may be vacated (removed) if you can prove that the arbitrator was biased.
Arbitration vs. Litigation: Comparison chart
|Type of Proceeding||Private - between the two parties||Public - in a courtroom|
|Type of Proceeding||Civil - private||Civil and criminal|
|Evidence allowed||Limited evidentiary process||Rules of evidence allowed|
|How arbitrator/judge selected||Parties select arbitrator||Court appoints judge - parties have limited input|
|Appeal available||Usually binding; no appeal possible||Appeal possible|
|Use of attorneys||At the discretion of parties; limited||Extensive use of attorneys|
|Waiting time for the case to be heard||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; costly|
Most contracts assume that any disagreements will be dealt with in the litigation process. The contract will list the jurisdiction in which the case is to be heard.
Many contracts in the 21st century 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.