Contract no-no-nos: arbitration.

Originally published April 16, 2014
Greg Taylor

Chances are good that you have at least one contract in which you have agreed to arbitrate—rather than litigate—disputes between you and the other party. It may even be the case that the arbitration clause is in the agreement because you wanted it there. After all, the consensus in the business world is that arbitration is better, faster and cheaper. But, is it really?

Hint: No, no and no, but keep reading.

Myth: Arbitration is better because it’s just like litigation, and there is no public record.

The only accurate part of this myth is that there isn’t a public record in arbitration. In fact, arbitration is very different from litigation. One example of this difference is the arbitrator’s broad authority to limit discovery in your dispute, including: (i) limit the number and length of depositions; (ii) limit the scope and number of document requests; and (iii) power to refuse the filing of dispositive (i.e., case ending) motions.

Myth: Arbitration is faster than litigation.

This can be true, but isn’t necessarily so. If both parties “truly desire unlimited discovery, JAMS arbitrators will respect that decision.” (Source: JAMS rules). Arbitration providers like JAMS, AAA and Endispute discourage broad discovery and favor limiting discovery in the manner discussed above. However, in the event of a complex commercial dispute and where both parties have an interest in a broad scope of discovery, the arbitration process will likely take as much time as it would take in court. According to AAA, the median start-to-finish process for disputes of $75,000-$500,000 was 297 days, meaning half of the cases took less time, but the other half took longer.

Myth: Arbitration is cheaper than litigation.

This can be true, if (and I think, only if) the arbitrator so narrows the scope of discovery that these monies offset other costs pertaining to arbitration. What do I mean by that? Well, you must pay a filing fee to the arbitration provider and you must also pay the arbitrator(s) an hourly rate (arbitrators tend to charge more than private practice attorneys). These costs are in addition to what you’ll pay your own lawyer, and discovery costs. In our court system, the filing party pays a nominal filing fee, and pays the judge nothing.

I’m not suggesting that arbitration is always the wrong decision. Rather, the decision to arbitrate—or agree to arbitrate disputes arising from a contract—should be a decision knowingly and deliberately made, based on the foregoing and on your particular set of circumstances.