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Arbitration in Business Litigation

Buffington Law Firm's business litigation trial lawyers are often asked about the pros and cons of arbitration as compared to litigating a matter in court.  In this article we will examine some of the factors regarding arbitration as a means of dispute resolution.

Arbitration is a process in which an arbitrator hears and evaluates evidence in an actual evidentiary hearing, and decides the case.  The arbitrator or arbitrators (there may be more than one) sits as judge and jury and issues a decision.  This decision normally has the force of law just as does a judgment deriving from a court verdict and in fact an arbitration ruling normally can be entered as a judgment in court if necessary.

Arbitration is often mandated by contract.  It is not uncommon for a business contract to specify that any dispute between the parties arising from the transaction set forth in the contract will be resolved by some form of arbitration.  These are important provisions and generally if a contract dispute arises between the parties, and one party wants to enforce the arbitration clause and litigate the matter in arbitration, the other party cannot escape arbitration.  The Federal Arbitration Act ("FAA") pre-empts State law on this subject, and operates to make any reasonable arbitration clause (and some unreasonable ones) in a contract enforceable.  Public policy favors arbitration for various reasons including a desire to unburden the court system.  If a dispute derives from a contract with an arbitration clause, unless both sides agree to waive the clause, generally the controversy will be decided in arbitration.

Arbitration has many advantages and disadvantages.  Some advantages may include:

  • Informality.  While an arbitration hearing is far from informal, the process can be less formal and quicker than a Superior Court or Federal Court trial.  Disputes in the litigation process, i.e. discovery disputes, etc. can often be resolved with an informal telephone conference with the arbitrator, rather than a full-blown noticed court hearing.  Evidentiary stipulations can be simplified.  The rules of evidence are usually somewhat relaxed in an arbitration hearing.  Some arbitration forums allow written declarations to be admitted as evidence.  These things may operate to reduce the cost of litigation.
  • Speed.  Business litigation disputes are rarely tried in court sooner than one year after the case is filed.  It may be quicker in arbitration. This too, may contribute to cost savings.
  • Finality.  The ruling of the arbitrator is rarely appealable, even if legally dubious.  By contrast rulings in Court can be and aften are appealed.  Thus an arbitration ruling usually represents the final word on a controversy.
  • Cost.  The speed and sometimes streamlined process of arbitration, and the lack of much in the way of a right of appeal, overall may reduce the cost of litigation.

Arbitration has many disadvantages, some of which are:

  • Cost.  Yes, despite the above, arbitration can be costly.  The arbitrator normally charges a significant arbitration fee; normally the hourly rate of the arbitrator.  This rate is often even higher than the hourly rates that lawyers charge.  The parties, or at least one of them, depending on the situation, will bear this cost.  In California even the simplest arbitration will likely entail a $20,000-$25,000 arbitration fee.  By contrast, sitting Judges are paid by the state or federal governments.  For low-dollar controversies, i.e. less than perhaps $100,000, arbitration is often economically inefficient.
  • No Right of Appeal.  As discussed above, unless the arbitration clause governing the arbitration provides for a right of appeal (which is rare) there are only very limited grounds for appealing an arbitration ruling in California.  In a practical sense there is rarely an operative right of appeal from arbitration.
  • No Jury.  Arbitration by its nature deprives the litigants of the right to trial by jury.

The above list is far from complete, but these are some of the factors that parties and lawyers must consider when deciding whether to arbitrate.  More to the point, when signing a contract, parties should understand that agreeing to an arbitration clause in a contract. is a far-reaching decision that the parties and their counsel should not accept without careful consideration.  This is also discussed in our article here.

If you are involved in a business dispute, Buffington Law Firm's business trial attorneys invite you to call us for a confidential, no-obligation free legal consultation.  You will speak directly with one of our experienced business trial lawyers.

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