When there is a contractual dispute that arises between two or more parties, the most common way that the argument is solved is through the legal system, which involves taking each other, or the other party or parties to court. However, depending on how exactly the contract was drafted and the dispute itself, the parties may opt for another option for dispute resolution. They may be forced or find it more to their liking to solve the dispute through arbitration. Some contracts have a dispute resolution clause that specifies how exactly parties in a disagreement should go about the process of resolving their issues. This dispute resolution clause is decided ahead of time, like when the contract itself is drafted and should be agreed upon by all the parties involved. Once the parties agree to the dispute resolution clause, they cannot, unless under limited circumstances, decide to file a lawsuit against each other. Even if they do, it is very likely that the court will enforce the already established arbitration clauses that the parties agreed to voluntarily. For some parties and contractual relationships, litigation may be seen as the best way to resolve a legal, contractual dispute. For others, arbitration may seem like the best way to go about it. So what exactly is the difference between the two, and why should some parties prefer one to the other?
There are a couple of key differences between arbitration and litigation that will influence this decision. The parties will have to weigh the cons and pros of each and then come to a logical conclusion about with one suits all of them, and which will be in accordance with the nature of the contract, as well as the standards prevalent in the industry. Here are seven of the main differences between arbitration and litigation that all parties should know about before deciding the best move forward.
Litigation tends to be costlier, not so much with arbitration.
Litigation is expensive; that’s a fact. You must hire lawyers, who will then have to draft and respond to a plethora of endless court hearings and filings throughout the duration of the lawsuit. Moreover, they will need to hire expert witnesses and sometimes will have to bring in consultants to help with the processing of the documents that have been exchanged during the discovery. In most cases, the parties to the disputes are the ones paying for everything, from the lawyer fees to all the other expenses that come with the court process. Even worse still, some of the contractual disputes will require time investment from the parties’ employees during the discovery process. They will need to respond to the lawyers’ requests with all the necessary information and documentation, in addition to the adversaries’ requests, such as depositions. On the other hand, arbitration is not so expensive, according to Hclawyers. One of the main reasons for this is that the discovery process when it comes to arbitration is limited. Thus, besides lowering lawyer fees, executives and employees need not devote most of their time participating in the said process. Additionally, there are not many filings that will be prepared and responded to, nor will there be as many hearings in arbitration as compared to litigation.
The process of arbitration is almost always private, while litigation is public, according to Lexology. Most of the time, filings from the court are made public, making it possible for anyone and everyone to access them. this means that even reporters and bloggers will be able to view the proceeding of the court case and provide it to the public. This, of course, will result in unwanted publicity and media buzz, which may result in one party, or all the parties involved, being put in a damaging light or ruining their reputation, as well as their business interests. Moreover, the litigation process may force facts that had originally been private and preferred to be kept away from the public eye to be brought to the surface. This is the reason why many a time, plaintiffs and their lawyers are more than happy to file lawsuits, as they put pressure on the other party, as well as the court itself, because of public opinion. However, in disputes where both or all parties involved are more than likely to make factual and legal accusations against one another, which may damage public perception, then the litigation process is not the way to go about it. On the contrary, arbitration is almost always private. The public is in no way involved in the process, and no records are made public unless all the parties consent to it. The parties’ papers and other documentations are kept private. Ergo, there is little concern about the public or the media when the dispute is being resolved, which is to the benefit of everyone involved.
In litigation, the court must follow the federal rules when it comes to evidence, and which evidence is admissible or not. The arbitration process, on the other hand, has a limited evidence process, and this means that the federal rules of evidence do not apply here. It is the arbitrators that will decide in what evidence is allowed. However, the arbitrators must follow the rules set by FINRA if the dispute is for financial reasons, according to The Balance.
Speed of dispute resolution
Glacial pace and litigation are more or fewer synonyms. Court cases filed today can take at least a year and a half to get to trial. Of course, crowded court dockets play a huge role in this delay, but gamesmanship between lawyers is also a huge factor. Arbitration, on the other hand, tends to move faster. In most arbitration cases, it will take only a couple of months to begin and attend the main hearing. Since the arbitration process is less formalized and can more or less be changed depending on the court case, there is less competitiveness, which means that the process can go faster.
Ability to appeal
Litigation may at times feel interminable since the decision made by a judge or magistrate in a lower court can be appealed in a higher court, restarting the whole process again. When the party that lost exercises its right to appeal a court’s decision, the parties involved must then again spend more time and money in a renewed litigation cycle, according to Via Mediation Center. Appeals also bring uncertainty, as the appellate courts may find partly for the losing party, and sometimes may even overturn the entire system altogether. For the former, no party will come out as the winner. Since most judicial decisions are appealable, parties know that eventually, even if it is after multiple attempts, they will be able to obtain a favorable judicial decision, and it will take a long while before a final decision is reached. In most cases, a vast majority, in fact, the decision made after the arbitration process is binding to all parties and is non-appealable. This essentially means that the arbitration decision will be the final word on the legal dispute. The only caveat is if the parties had agreed in the dispute resolution clause that the final decision is appealable. Moreover, if the losing party can show that there was any form of bias or fraud by the arbitrators, then this will change everything, according to Lexis Nexis. Binding arbitration is when the parties involved in the contract agree that in the event of a dispute, they will use the arbitration process and that the decision that the arbitrator, or arbitrators, puts forward is binding to everyone involved. Here, there is no appeal process. The decision of the arbitrator may be reviewed by a judge, and the decision, if biased or unjust, may be vacated, removed, by the judge. The ability to not appeal in most arbitration cases and the decision is the reason why the parties involved will most likely resolve their dispute sooner rather than later. However, the flip side is that the losing party loses the ability to challenge a decision regarding the decision made, which may not always be correct.
Litigation is unpredictable, less so with the arbitration.
There are a couple of reasons that result in the unpredictable nature of litigation, even when the law seems as clear as day on how the dispute should be resolved. One, it is not till after the lawsuit is filed that a judge is assigned to handle the case. The judge assigned may be knowledgeable about the facts, fallacies, and legal issues that underpin and constitute the lawsuit based on experience. However, the opposite may also be true. Second, though the parties to the lawsuit may conduct as intensive and extensive a research as possible on the rulings that the judge made on previous cases that were akin to this one, and even get a bit of understanding in the temperament id the judge, it is not always the case that the judge will be consistent in the new case. Third, the jury. The jury is unpredictable and can be swayed by emotions, the charm of the lawyer or witnesses brought forward, human nature, and even preexisting feelings towards a certain party, as opposed to the facts of the case. This is a particular problem when large sums of money are involved.
Finally, if the case involves a lot of complex facts and processes that only those that have been in the industry for a long time will be able to fully understand. These industry-specific minutiae will be a hard concept for both the judge and the jury to understand, and they may get a bit confused. This means that the decision that is eventually passed will not be one that reflects the facts of the case. On the other hand, arbitration is a bit more predictable for the participants. The parties in the dispute will choose at least one arbitrator who will be hearing their case, according to Emsleys. Moreover, the arbitrators that have been chosen will have some experience in the field or industry that the dispute is based in, and thus they will be able to make informed decisions. They are more likely, when compared to judges, to be able to resolve the dispute without being distracted by emotions, feelings, and charm. Since the arbitrators are hired and paid by the parties involved, they are incentivized to make clear, fair, and right decisions. If they fail to do so, they will be branded as uniform and biased, and thus will be to the detriment of their reputation, and will hinder them from being called as arbitrators to other cases.
As aforementioned, litigants do not have the ability to choose a judge. They must conform and acquiesce to the procedures and rules that the assigned judge puts in place. They are also bound by the judge’s decision on where and when to meet for the court proceedings. This means that they will have to meet at the time and place that the judge finds most appropriate to meet, regardless of the parties’ engagements and previously established schedules. By contrast, arbitration is more flexible. Aside from choosing the arbitrators that will be in charge of the process, the parties involved will have the power to select rules they will have to abide by during the entire process. A quintessence of this is the ‘Commercial Arbitration Rules and Mediation Procedures’ by the American Arbitration Association. The parties also can tweak these rules, determine how exactly the arbitration process will proceed, and, essentially, dictate the arbitration process in its entirety. The parties also have the power to decide where and when the arbitration hearings and meetings will take place.
Difference is preference
When parties sit down during the formation of a contract and are negotiating on whether they should litigate or arbitrate when a dispute arises, if it arises, they should carefully consider the key differences between the two processes. The differences, depending on the disputes and the parties themselves, co either be pros or cons, and it is up to the persons and people involved to try and determine which one is best suited for them in a particular situation.