Arbitration vs. Litigation – Substantive Differences Beyond Time and Expense

In an earlier post, “Is Arbitration Quicker, Cheaper and Better for You?” I discussed why having a faster and less expensive dispute resolution mechanism may not be in your best interest.  Make no mistake, however, the differences between traditional litigation and arbitration go well beyond the time and expense it takes to complete the respective processes.  The following are a few of the more notable substantive distinctions between these two dispute resolution mechanisms:

  1. Litigation allows for extensive “discovery” (e.g., depositions, document requests and interrogatories) from parties and non-parties.  Discovery in arbitration often is limited to document requests, but can be broadened by the arbitrator or agreement of the parties.
  2. Because arbitrators are not required to abide by any Federal or State Rules of Evidence, they routinely consider information that never would be admissible in court.
  3. A “bad” decision in a court of law almost always can be appealed.  An arbitrator’s decision, on the other hand, rarely can be appealed – even if it obviously is contrary to the applicable law.
  4. Notwithstanding a lack of empirical data, most litigators agree that arbitrators are much more likely than a judge/jury to issue a compromise decision and/or one based on fairness principles rather than strict legal principles.
  5. Because arbitration is a private mechanism, it is easy to maintain complete confidentiality.  Litigating in court is an inherently public event and one in which it can be difficult or impossible to maintain the confidentiality of even the most sensitive business information, if that information is relevant to the dispute.
  6. Arbitrators have no ability to issue preliminary injunctions, freeze a bank account or make other equitable orders that judges routinely make.

In light of these and the myriad other differences between litigation and arbitration, in-house counsel should not make general assumptions as to whether arbitration or litigation is a “better” dispute resolution mechanism to employ in company contracts. Rather, think like a litigator at the time you are negotiating a contract with a business partner.  Consider, (a) how your company or your business partner might breach the agreement, and (b) what would be important if the dispute had to be litigated or arbitrated. For instance:

  • Who is more likely to need depositions to uncover the other’s position?
  • Will either side want to bring up issues that, while irrelevant to the real issues at hand, might portray the other party as deceitful, untruthful or morally corrupt?
  • Is one party likely to take a position based more on common notions of fairness, while the other party’s position is based on a strict adherence to legal principles?
  • Would either side be harmed significantly if certain information critical to the legal issues was disclosed to the public?

Of course, no one wants to think about how the deal might go bad when the business relationship is just beginning, but if you wait until a dispute arises, the applicable dispute resolution rules will be carved in stone and it will be too late to do anything about it.