WHERE SHOULD YOU LITIGATE YOUR BUSINESS DISPUTE?: In an Arbitration? or through the Courts?
Henn, John H., Dispute Resolution Journal
A key issue for business managers and executives is to decide on the process for dealing with disputes of various kinds, particularly those arising out of business transactions, such as those with suppliers, customers, partners, licensees, and others. There are many factors to consider in deciding whether the court or the arbitration hearing is the best place to resolve these disputes. This article discusses the relevant factors and suggests how they could affect a businessperson's decision.
Lawyers who advise business entities commonly confront the question of whether to resolve disputes by arbitration. This usually comes up when the parties are negotiating a transaction agreement. Often the decision is made, not as a result of any systematic consideration of the merits of arbitration versus a judicial forum, but rather as a result of anecdotal information about good or bad experiences with each process. This article aims to provide the basis for a more systematic consideration of the arbitral versus judicial alternatives.
At least since the early 1990s, arbitration has become more popular with American business, which has been moving away from resolving commercial and business disputes through courtroom litigation and toward arbitration.1 I use the term "courtroom litigation" to distinguish it from arbitration, which also can be considered a form of litigation, because both processes are adversarial and are conducted before an independent, neutral decision maker. Courtroom litigation is always administered by independent administrative staff, while arbitration is administered by a neutral administrative body only if the parties agree to it.2 While an arbitral award can be voluntarily complied with by the losing party, often it must be entered in a court of law so that judicial mechanisms made possible by governmental power will allow for its enforcement against a noncomplying party. The era of judicial hostility to enforcing arbitration agreements, and enforcing arbitration awards, has been dead for several decades.3
Arbitration of commercial disputes always results from an agreement to arbitrate entered into either before or after a dispute arises. Whether to agree to arbitration turns on an understanding of the pros and cons of arbitration and courtroom litigation, in the context of considerations that matter to commercial entities. These will be discussed next.
Key Factors in Deciding Whether to Arbitrate
Most companies involved in a business-to-business (B2B) dispute consider minimizing out-of-pocket costs and the cost of tying up management to be of high importance. When compared with courtroom litigation, arbitration is normally the more economical alternative. The principal factors informing this view are lower discovery costs in arbitration, fewer pre-trial motions (e.g., dispositive motions in arbitration can, in certain cases, be allowed in the arbitrator's discretion, but are not that common), and a more limited right to appeal.
Discovery in arbitration almost always involves lower discovery costs than courtroom litigation. While document discovery is routinely authorized in arbitration under the rules of most ADR providers, wide-ranging document requests are not.4 Moreover, interrogatories do not exist in arbitration, unless the parties have agreed to them. More significantly, depositions can be taken only with the agreement of both parties, and even then, deposition testimony can only be used as evidence.5 As a restdt, depositions are rarely taken in small cases, and they are limited in the large, complex case.
There is a good reason why depositions have been available for many decades in courtroom litigation. They are thought to be a particularly effective means of discovery. However, this general proposition should be evaluated in the context of the dispute for which an arbitration is being considered. For example, the need for depositions may be much reduced in a B2B dispute between contracting parties who already know each other and each other's personnel (or can be expected to have this knowledge by the time a dispute arises), so that a "surprise" witness is unlikely to surface. …