The one question I get asked the most in the beginning of the litigation process is whether to choose arbitration or litigation. It is really not that easy. The route of arbitration has very specific requirements. Failing those, litigation is the only choice. Moreover, when arbitration is an option, understanding costs associated with arbitration vs. litigation is extremely important. An understanding of the procedures, pros and cons are important in making an informed decision.
WHEN IS ARBITRATION AN OPTION?
Arbitration requires joint consent of all the parties. The first step in this process is the arbitration agreement. Without an arbitration agreement there is no requirement to arbitrate. So, if arbitration is desired, the original agreement in place between the parties has to include an arbitration clause. However, the clause has to conform to specific requirements in order to arbitration. Not only has there be an agreement to arbitrate, but the arbitration agreement has to include the method of arbitration.
There are two primary methods of arbitration. These are arbitration organizations with universal rules of arbitration that will govern how the arbitration works. To be effective, the arbitration agreement should include which set of rules to use. The organizations are the American Arbitration Association (AAA). The other is JAMS. The vast proportion of arbitrations that occur from this office are with AAA.
Moreover, it is helpful to select the rules from the organization. For example, AAA has commercial rules, construction rules, consumer rules, employment rules, etc. The selection of rules sets the tone for the entire arbitration process. If the selection of rules is not in the arbitration clause, the parties have to later agree to what rules to use. By the time any disputes get to this stage, an agreement on any level is difficult to obtain.
Finally, the location to arbitrate is important. Selecting the location in the arbitration clause also limits any need to cooperate once arbitration is needed. At the very least, the county should be listed. We prefer to list the city as well.
Arbitration agreements are important at the very beginning of any relationship between the parties. Once arbitration needs to be invoked, there is little chance that the parties will be able to agree to arbitrate, the arbitration body, the rules to use, or the location to arbitrate, or anything else to proceed.
WHAT ARE THE COSTS OF ARBITRATION?
People are often surprised at the costs of arbitration. However, those costs need to be placed in perspective and compared to the overall costs of litigation. Arbitration costs are paid up front. These costs can be substantial and are based on the amount of the claim at issue. However, the tradeoff is a much shorter and limited discovery process.
Discovery is the stage of litigation where the claims and defenses in a matter are investigated. This step is comprised of submitted questions called interrogatories, requests for documents, depositions, and the subpoena power. This is typically the most extensive and expensive process in litigation. However, in arbitration, the discovery process is abbreviated, reducing the costs of litigation substantially. The reduced cost of litigation more often than not dramatically offsets the arbitration fees themselves.
Arbitration is a viable option but must be selected in the contract governing any potential future dispute. The process is faster and is typically cheaper. However, the costs of arbitration must be paid up front unlike litigation. Moreover, there arbitrator is not typically a judge but rather an attorney or industry expert. As such, the rule of law may often be subjected to the arbitrator’s whim. As such, there are pros and cons involved before making any decision to arbitrate. We can help and walk you through the pros and cons of arbitration with regards to your own contractual relationships.