To Arbitrate or Not to Arbitrate? Key Factors to Consider before a Dispute Arises
If you want to arbitrate a dispute (instead of litigate in court), you must agree to do so in advance. A party who has not agreed from the outset to arbitrate will not be compelled to arbitrate, and a party who has agreed in advance to arbitrate cannot flip-flop and subsequently opt for court proceedings if a dispute arises. Instead, the parties are bound by the terms of their arbitration agreement. Additionally, if the agreement is ambiguous, then both Tennessee and federal law establish a strong presumption in favor of arbitration.
So, if the decision to arbitrate must come now, instead of later, then which route is advisable? There is no one-size-fits-all approach or answer to that question, but the following considerations should inform that decision.
- Joining Additional Parties
If you cannot obtain arbitration agreements with all parties impacted by a particular issue, then you probably do not want arbitration agreements with any of those parties. For example, for a party such as a prime contractor who may receive a claim from the owner and wish to assert that claim against a subcontractor, it is very important for the owner, prime contractor, and subcontractor to be involved in the same dispute-resolution proceeding. Therefore, each contract the prime contractor enters must have consistent dispute resolution proceedings; if the prime contract does not require binding arbitration, then the subcontracts likewise should not require binding arbitration.
Arbitration almost invariably results in less discovery than what would be possible in litigation because, unlike in litigation, discovery in arbitration is not governed by the rules of civil procedure but rather by the arbitrator’s attitude about discovery. If reducing costs is a high priority, then arbitration, with its discovery limitations, would be more advantageous than litigation. However, if you are likely to be a defendant in a dispute, more discovery would be important, thereby making litigation more advantageous than arbitration.
Some attorneys are more comfortable with the rules of evidence and better able to use them to keep the decision maker from learning uncomfortable facts, which would be a reason to opt for litigation. Other considerations, like how well clients keep records and access to witnesses, also affect this calculus. Also, the rules of evidence do not apply in arbitration, causing some information to be admitted into evidence during arbitration that would not otherwise be admitted in litigation. If you are likely to do well under rigid evidentiary rules, litigation would give you an advantage over a party who is not as facile with the rules of evidence.
The decision in arbitration will almost certainly not be reviewable by the courts. If you price the ability to get a decision and move on with business, the finality of arbitration would be an advantage. However, if you are uneasy about turning over a weighty decision to an arbitrator without the opportunity for review, the inability to appeal an arbitration decision would be a disadvantage.
If your client will want a jury, then you will want to litigate the dispute. If your client will not want a jury, then whether to litigate is a closer call. Compared to litigation, arbitration allows for much more input into how many arbitrators there will be (e.g., one or three), who the arbitrators will be, how they will be chosen, and the required qualifications (e.g., an architect, engineer, or contractor) of the potential arbitrator.
- Site Visits
If you want the opportunity to conduct a site visit, you are more likely to get that opportunity in arbitration. Many times, a site visit is a deciding factor in the case, and there is almost always a site visit during an arbitration.
- Summary Judgment
It is much more difficult to dispose of issues on summary judgment in arbitration. Therefore, if you want the option and are prepared for the risk to have claims disposed on summary judgment, litigation is more advantageous.
- Equity-based Decisions
It appears that, compared to decision-makers in litigation, arbitrators are less likely to follow the law and more likely to make decisions based on their individual notions of fairness. Given this perception and the limited ability to overturn an arbitration award, if you have a good equitable position but a bad legal position, you will find arbitration far more advantageous than litigation
- Procedure Predictability
In litigation, procedures are more predictable. Within the bounds of the rules of civil procedure, the rules of evidence, and common law, you will be able to predict who may be joined in the case, how much discovery you can take, what will be considered by the judge or jury, etc. In arbitration, however, all of these things are largely left to the discretion of the arbitrator; therefore, it will be more difficult to predict how they will be decided.
Arbitration will allow the parties to adjudicate their dispute in a much more private fashion than litigation. Unlike litigation, where all of the court records are public, none of the filings or proceedings in arbitration are publicly record. Also, covenants of confidentiality can be drafted into your arbitration agreement.
Whether it is faster to resolve the dispute in arbitration depends upon a number of factors, such as the size of the dispute and the court where the dispute would be filed. For example, a case in General Sessions court will almost always take less time to resolve than litigation of the same case in chancery, circuit, or district court due to the absence of formal pleadings, limited discovery, and the absence of the appellate procedures.
All nationally recognized arbitration services charge administrative fees that far exceed the initial filing fees in litigation. Additionally, the parties must also pay the arbitrator’s fees. While the administrator and arbitrator fees are important considerations in evaluating the relative cost of arbitration versus litigation, other factors such as the cost of discovery, motion practice, and appeal are also important considerations. Given these factors, a good rule of thumb is that arbitration is usually less expensive than litigation in small cases, but in large, complex cases, it is a much closer call.
- Administering the Arbitration
An arbitration without an administrative organization would be less expensive than the same arbitration with such an organization. However, without an administrative organization, the arbitrator could have to resolve issues about the arbitrator’s own jurisdictional reach or the arbitrator’s own conflict of interest.
Whether to agree to arbitrate is not a one-size-fits-all decision. Depending upon these considerations and others, arbitration may be advantageous in one situation but disadvantageous in others.