Arbitration Proceedings: The Advantages and Disadvantages of Arbitration
Using Arbitration Provisions in Agreements
Both litigation and arbitration are methods of addressing disputes and each have their pros and cons. The choice of which avenue to take will depend on the given dispute. This article explains arbitration options in agreements and the potential advantages of them.
What Is Arbitration?
Arbitration is a private process that addresses a complaint. In the U.S., the default process for disputes is for our courts to hear and redress a complaint—also referred to as litigation. Over centuries, the judicial system developed several requirements and mechanisms to protect those involved and to resolve a complaint—such as institutional bodies, procedural requirements, discovery tools, evidentiary standards, factual decisionmakers, legal conclusions, remedial mechanisms, and appellate reviews.
The primary alternative to litigation is an arbitration proceeding. This process involves a contractual agreement between parties to give up their default right to have our courts resolve a dispute and to select a different process and institution that will resolve the dispute. Arbitration is the privatized version of public litigation. In fact, courts also order parties to mediation (a form of arbitration) before proceeding to trial.
Why Have an Arbitration Proceeding Provision?
So, why would you have an arbitration agreement if you’re going to end up in the arbitration process regardless? The answer is simple.
Arbitration agreements mean that parties will arbitrate a dispute at the beginning. In litigation, mediation generally occurs after the parties have almost prepared a case for trial. In addition, the parties can establish the terms for an arbitration proceeding before the onset of a dispute. Ultimately, the justifications for giving up the right to litigation can be reduced to a cost-benefit analysis.
Arbitration can provide an effective, fair alternative to litigation for both parties. Drafting a fair arbitration provision means that both parties can avoid the months or years of litigation over the enforceability of the arbitration provision, which is wasteful and inefficient for all of the parties involved. To do so, an arbitration provision should focus on fairness based on the primary considerations related to costs, time, fairness, finality, and confidentiality.
When Are Arbitration Provisions in Agreements Enforced?
Generally, courts enforce pre-dispute arbitration agreements with some notable exceptions—which essentially boil down to how fair is the arbitration provision and how fair were the circumstances in which the parties made this agreement. The enforceability of these provisions also varies depending on whether the provision is between parties having inequal bargaining power (such as businesses and consumers or employers and employees) or equal bargaining power (such as licensors and licensees and franchisors and franchisees).
The fairness of the terms can be summarized based on whether the party with superior bargaining power has slanted the benefits in their favor and placed the detriments on the other side’s plate. The fairness of the circumstances can also be summarized by the parties having the freedom to knowingly give up their rights to litigation—essentially meaningful consent. The primary issue for enforceability of online arbitration clauses focuses on whether the other party had actual or constructive notice (or knowledge) about the significant terms and conditions of the arbitration clause—what the parties are agreeing to by arbitrating a potential dispute.
Parties are properly placed on constructive or inquiry notice that they are agreeing to be bound to arbitration when the agreement warns of the binding arbitration in the same location as where the party is required to agree to these terms and prompts the party to take affirmative action to demonstrate assent. The warning should also provide conspicuous clarity of the significant arbitration terms.
How to Establish Online Consent to Arbitration Terms?
Where parties are entering into an arbitration provision online, the parties should have a provision stating that “By clicking Sign Here, I agree that I have read and agree to be bound by the Arbitration Terms and Conditions.” The phrase “Arbitration Terms and Conditions” should be hyperlinked to a page containing the full terms and should be conspicuous (by having larger, bold, or different color font). In these circumstances, a party will generally have sufficient notice of the terms and conditions and that a click would be construed as consent to those terms.
Historically, such consent has been sufficient for courts to enforce the arbitration provision. However, the recent trend has been that the party’s consent must also have notice of the terms, which also needs to be consistent with the actual terms.
How to Establish a Fair Procedure for Arbitration?
Provide the signing party with an acknowledgement explaining the arbitration process and the benefits and detriments to consider. There are several potential advantages and disadvantages to arbitration versus pursuing a lawsuit in a court at law. The extent that you experience either the advantages or disadvantages associated with arbitration depends on your arbitration agreement. That is because an arbitration agreement is how you decide the arbitrator or how the arbitrator is selected, the rules that apply (such as allowing or limiting discovery), establish time limitations, and determine the extent that an arbitration award can be appealed.
We are stating some of those advantages and disadvantages here for your consideration, along with a brief general statement on each. Of course, what one person may see as an advantage another may see as a disadvantage. And your own experience may not be the same as what is stated here.
What Are the Possible Advantages of Arbitration Provisions?
More Affordable
Historically, arbitration has been seen as a cheaper way to resolve disputes, on average, than litigating in court. However, this is not always the case, as described in the Disadvantages section below.
Quicker Results
Although there are exceptions, arbitrations tend to follow more specific and defined timelines toward resolving a dispute. From filing to trial, the average time for arbitrators to make a decision ranges from 8 months to 16 months while the average for the federal judicial is around 27 months. Further, arbitrators do not always face crowded work and caseloads like trial courts do. These factor favorably into an arbitrator’s ability to get to a final hearing and decision quicker.
Fairness
Often arbitrators are selected by agreement of both parties, by a third-party arbitration service, or via an outlined method where input is allowed from both parties. This means that in many cases, no single party controls who the arbitrator (or arbitrators) will be. Where a business interacts with others from a different nation or state, arbitration provides an opportunity for neutrality.
Finality
It is very difficult to appeal arbitration rulings, even if glaring mistakes have been made by an arbitrator. This finality can be a positive in relation to ending a dispute, one way or the other, and allowing the parties to move on and to cease expending time and resources on the matter.
Simplified procedures
Litigation can involve mounds of paperwork, multiple hearings, depositions, subpoenas, and similar processes. An arbitration may reduce or potentially eliminate some of those time-consuming and expensive tools of litigation.
Confidential
Arbitration hearings do not take place in open court and transcripts are not part of the public record. Many businesses notice that potential customers searching their name on Google may result in a federal lawsuit being one of the top search results because several websites automatically publish even the existence of the case. Avoiding this situation though can be very valuable for parties in some cases.
What Are the Possible Disadvantages?
Costs
The cost factor can also be a "disadvantage" because arbitration does not always reduce the costs of resolving a legal problem. This is because arbitration can vary in complexity and can take many forms, some of which may be more likely to increase the costs versus litigation. For example, the arbitration costs in commercial cases increase depending on the amount in controversy and whether the case proceeds to a hearing—these high filing fees do not even account for paying the arbitrator or panel of arbitrators. Also, the parties to arbitration often share certain of the costs of arbitration, such as the arbitrator’s fee. Although there are fees associated with filing a lawsuit, those fees are generally less, and often much less, than the fees for filing an arbitration and paying an arbitrator.
Fairness
Arbitrators are required to be neutral and fair, but those requirements are not the same standards that the U.S. Constitution requires of our federal judges. Some people believe that some arbitrators may be, or are, biased towards or against a particular type of party (i.e., one who is “pro employer” or “pro employee”) or a particular type of claim. Some people also believe that those asking for or requiring arbitration may be more familiar with specific arbitrators, as well as the process in general.
Speed
Just like they aren't always cheaper, arbitrations are not necessarily always faster than litigation. This is particularly possible in cases with multiple parties, multiple arbitrators, and complicated legal disputes. This also occurs because unlike the judicial system, attorneys are not held responsible for engaging in delay tactics.
Location
The location that the arbitration is required to be held in may not be convenient to you, and thus could raise your cost. While online arbitration has overcome some of the physical barriers, these types of arbitration are rare and present different issues.
Finality
As noted above, it is very difficult to appeal arbitration rulings, even if an arbitrator has made a blatant mistake. The more complex a dispute, the greater possibility of an error—especially when coupled with the speedy and informal nature of arbitration. While arbitrators are no less prone to committing errors than judges, this finality can sometimes result in what may be seen as an unfair result (certainly from the losing party's perspective!) with only a small chance that a court can step in to correct it. Your ability to obtain justice is better when those who make legal precedent can reverse that legal precedent (which the arbitrator will likely follow) or when a majority of your peers must resolve the facts the same way (which one to three lawyers will resolve).
No Jury
For many people, having a jury of their peers hear their case is an important right. Arbitration does away with juries entirely, leaving matters in the hands of one or more arbitrators, who basically play the role of both judge and jury. Importantly, the evidentiary rules exist, in large part, to ensure the jury does not hear or see a piece of evidence. Arbitrators, however, do hear and see evidence that a jury might not and generally do not strictly apply evidentiary safeguards.
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