Here are six things to consider when deciding whether to arbitrate a claim.

For over a century, arbitration has been utilized to resolve disputes as an alternative to navigating the traditional court system. In recent years, arbitration has grown immensely as a dispute resolution tool, thanks to comprehensive legislation at the state and federal level and overburdened court systems that have exacerbated the need for viable alternatives to traditional litigation of claims that may arise in any context.

Arbitration is entirely a creature founded in contract law. Everything about it arises solely from the agreement of the parties. This means that, if negotiated, your company can design almost every aspect of this resolution procedure for any dispute arising out of contractual relationships. The only limits to customizing arbitration are: (1) creativity; and (2) public policy and legislation.

Based on desires to manage specific risks, control losses, and allocate costs, your company should have an overall strategy that determines when it will insist on (or at least negotiate for) arbitration as its preferred mode of resolution and – just as important – when it will refuse (or negotiate against) arbitration agreements.

There are six general considerations in evaluating arbitration:

1. Result Risk

Since arbitration is a form of litigation, it is important to remember that losing can be a distinct possibility.  Depending upon the language of the governing arbitration provision, the losing party may have to pay prevailing party’s attorneys’ fees.  If the risk of losing is substantial and may severely impact the company, the concern about finality (discussed in Section 5 below) may be more persuasive than other factors.

2. Identity of Adjudicator

Believe it or not, sometimes your company may want a jury. Even if you don’t, in most instances, your company can eliminate a jury (via a jury waiver provision in your operative agreement) while retaining the rest of the court system; i.e., a professional judge with one or two appellate courts standing above to (with luck) remedy any mistakes, particularly where the trial court has misapplied the applicable law or made an error of law. As we will discuss in Section 5 below, the arbitrator’s misapplication of the facts to law will not be grounds for vacating the award.

3. Cost

All else being equal, an arbitration may be less expensive than a jury trial, however, this depends upon the nature of the claim(s) to be resolved. Historically, arbitrations featured very little discovery and short hearings, but now Federal Rules of Civil Procedure-style discovery orders are entered routinely (many arbitrators are former federal judges). If you add the cost of a three-arbitrator panel billing at several hundred dollars per hour per arbitrator, a multi-week out of town arbitration, and the cost of a court reporter present, your company can easily find itself spending thousands of dollars per day on the final hearing itself, not including the cost of outside counsel. Also consider that each issue posed to the arbitrator(s) will require motions, memoranda of law, and hearings—all of which must be paid.

4. Speed

Arbitral proceedings typically move at a faster pace than court calendars. Sometimes this is good, but other times, however, it simply means that the plaintiff’s lawyer who makes a career out of suing your company has found a “conveyor belt” to limit costs and expedite settlements.  

5. Finality

Arbitration is attractive for some resolutions because they are final. However, final (for the most part) means final—no (or severely limited) right of review. There are very limited grounds under the Federal Arbitration Act (FAA) and under the Revised Florida Arbitration Code to vacate or set aside an arbitration award. Conspicuously absent from the laundry list of grounds to vacate an arbitration award, is misapplying the law or arriving at the patently wrong result.  If the finality of the process is not something that your business can tolerate, arbitration may not be a suitable option.

6. Confidentiality

When considering the necessity of maintaining confidentiality, arbitration wins over the court system every time, with rare exceptions such as FINRA arbitrations where the final arbitration awards are published. If the subject of the relationship is highly confidential (trade-secrets or proprietary information), creating a confidential arbitration procedure will be vastly superior to litigating in court.

There are mechanisms for attempting to protect trade secrets in litigation, but they are clumsy and unreliable. Courts are, by nature, open forums. It is an uphill and cumbersome battle to fight against the nature of court proceedings. An arbitration proceeding, conversely, can be completely closed to public scrutiny.

For each of the six considerations – depending upon the nature of the underlying contractual relationship – the “conventional wisdom” of always defaulting to arbitration could easily turn out to be wrong. Keep in mind that one size does not fit all. The point is to take a long hard look, backed with research, before deciding that your company will seek to require arbitration for each and every dispute.  The actual drafting of a specific arbitration provision is beyond the scope of this short article. Unless you are on very familiar ground, consider consulting with outside counsel to discuss the specific mechanics behind this alternative forum.

Reprinted with permission from the August 29, 2022 edition of Daily Business Review © 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.