Arbitration or Litigation: Five Factors to Consider When Making the Choice

By McGinley, John R., Jr. | The National Public Accountant, June 2002 | Go to article overview

Arbitration or Litigation: Five Factors to Consider When Making the Choice


McGinley, John R., Jr., The National Public Accountant


Conventional wisdom poses that arbitration is a better way to resolve disputes than litigation. Depending on the identities of the parties, the type of dispute, and the amount at stake, however, an aggrieved party might fare better in court.

The decision to arbitrate or go to court is core to the strategy in many contract negotiations and in most commercial disputes. If the dispute involves technical issues or a small monetary amount, or if the parties want to preserve a commercial relationship, arbitration may be the better choice. If, however, the dispute is truly contentious and involves a complex legal issue such as the interpretation of a contract clause or the intent of a law or regulation, or if the relationship between the parties is marked by adversarial hostility or mistrust, litigation in traditional judicial forums may be the better route.

Both arbitration and the judicial process have pluses and minuses. Because the decision how to resolve future disputes is often made when the relationship is formalized -- well in advance of any disagreement -- the parties should consider these pluses and minuses as early as possible. The following are five major differences between arbitration and litigation.

Arbitration is Less Formal

In arbitration, the parties often choose an arbitrator or select from names provided by an outside organization such as the American Arbitration Association (AAA). In theory, arbitrators generally are chosen because they are fair-minded and have expertise in the subject of the dispute. Thus, they would need less education about the technical matters than would a judge or jury, and they should understand the nuances of the issue. Reality and theory may, however, diverge. The arbitrators on a list may not really have technical knowledge of the specific subject. Some dispute resolution experts feel that an arbitrator takes a more objective view of circumstances that might sway a jury that develops sympathy -- or antipathy -- for one of the parties. Yet arbitrators, like juries, bring to the process their own biases and beliefs based on life experience.

For the most part, judges are assigned to cases randomly. They cannot possibly be knowledgeable about technical issues of every case, and they rely on testimony and argument to make their decisions. Although they have great discretion, judges are bound by rules of procedure and evidence. A judge's thinking generally has been set down in written opinions or expressed at oral arguments. Attorneys who practice in the courts have read those opinions or heard the judge's questions at argument and over time may develop a sense of what may be important to a particular judge. In contrast, a list of arbitrators may include individuals whose decision-making tendencies and backgrounds are completely unknown.

Judges usually pen opinions explaining the basis for their decisions. Arbitrators, however, make an award without written explanatory opinions, unless the parties specifically require an opinion as part of their arbitration agreement. An arbitration award may provide little guidance, even if the parties want such guidance. Rules of evidence are relaxed in arbitration proceedings. For example, "hearsay" evidence is frequently admitted, and contract interpretation cases may permit testimony that would be inadmissible in a trial. This informality may work against a party if the dispute hinges on documents and testimony that a judge would not admit as evidence, just as it may benefit a party that has reason to fear rigorous evidentiary standards.

The Right to Appeal an Award is Limited

In court, the loser may appeal. Other judges will review the proceedings to determine whether the trial court committed an error. The loser at least has an opportunity to correct mistakes that may have led to an erroneous judgment or verdict. This is an important right. The trier of fact knows that an appellate judge may scrutinize the decision. …

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Arbitration or Litigation: Five Factors to Consider When Making the Choice
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