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Business Insights

By Roy Banerjee Email By Roy Banerjee
May 2009
Business Insights

With the use of alternative dispute resolution (ADR) on the rise, both individuals and businesses should be aware of the important implications of using arbitration as one form of ADR.

Arbitration is an alternative to traditional litigation whereby the parties in dispute bring their claims before an impartial third party, called a “neutral,” who decides the case. Arbitration proceedings can be handled by either a single neutral or a panel of neutrals. In any case, this impartial arbitrator, and not a court of law, makes the final, binding award which can then be enforced by courts of law.

Because arbitration can be less expensive and time-consuming than litigation, arbitration clauses are appearing more frequently in many different types of contracts, from employment to real estate.

However, arbitration clauses and the arbitration process have binding and important effects; thus, it is important to review contracts carefully to see if an arbitration clause has been included, so that you can make an informed decision before signing. An arbitration clause is a provision of the contract. In fact, arbitration clauses are usually more enforceable than the other clauses in most contracts. Thus, once a party signs the contract, the arbitration clause is almost always enforced despite the fact that doing so may be disadvantageous to one party.

Advantages

Arbitration can have several advantages over litigation.

Most importantly, arbitration can reduce the time and cost of resolving a dispute.

Furthermore, for businesses concerned with maintaining business relationships and public perception, arbitration can be more confidential and less adversarial than litigation.

Parties in arbitration also have greater control over the arbitration process. For example, in drafting an arbitration clause, parties can have input as to who will serve as the arbitrators. Often, parties will agree that only experts in their relevant field can serve as arbitrators.

Disadvantages

Despite these advantages, however, arbitration can have serious drawbacks.

Arbitration clauses contained in contracts narrow the choices available to each party. If an arbitration clause is included in a contract, both parties lose any alternative options; they must arbitrate. On the other hand, if an arbitration clause is not included in the contract, the parties are afforded more freedom. They can either choose to litigate the matter in court, or they can bring the matter in an arbitration proceeding if both parties so choose after the dispute arises. Consciously deciding not to include an arbitration clause in a contract may save the parties from later experiencing frustration and dissatisfaction with being forced into the arbitration process.

Moreover, by choosing to arbitrate and not litigate, a party loses the opportunity to go before a jury and have the issue decided by a panel of his peers. A jury composed of several members minimizes the danger of having one biased decision maker. Because the decision of a jury is inclusive of all of the jurors opinions, both parties are in less danger of having a single individual decide the outcome of the matter based on his or her own individual prejudices. Most arbitration proceedings are presided over by one neutral. This one neutral is authorized to make a binding decision despite their own biases and prejudices that may affect their judgment. With arbitration, especially those with only one neutral, no one holds the individual decision maker accountable, thus allowing this neutral the ability to make unfair decisions.

Additionally, arbitration does not necessarily have the same extensive legal tools available to discover all the evidence that is relevant to the case before the hearing. In arbitration you may not be able to take depositions of all potential witnesses, and you may not be able to get copies of all of the relevant documents from potential witnesses.

Unlike litigation, which provides an internal system for appeals, arbitration has no parallel appellate system. A party cannot appeal an arbitration decision to a higher panel of arbitrators. Furthermore, arbitration clauses often contain provisions preventing the losing party in arbitration from seeking review of the arbitrator’s decision from a court of law. Because arbitration provides no process for appeals and because courts will only overturn arbitration decisions on very rare circumstances, most losing parties who feel that the arbitrator decided incorrectly are without recourse. The losing party is in danger of having an important decision wrongly decided by an arbitrator and losing the right to go to court. Because decisions resulting from arbitration proceedings are so difficult to overturn, parties to contracts should be aware of the inclusion of any arbitration clause.

With traditional litigation, frivolous and unmeritorious claims can be dismissed using certain pretrial motions such as a motion for summary judgment. This motion allows a party to petition the court to dismiss a claim against it on grounds that the claim is unfounded and unsubstantiated. Arbitration, however, does not provide for such pretrial motions. Thus, a party must go through with the entire process of arbitration in order to resolve the issue. In cases involving frivolous and unmeritorious claims, the use of arbitration can actually be more costly and time consuming than litigation.

Thus, while arbitration may enable a party to resolve a dispute quickly and cost effectively, parties should also remember the significant disadvantages to arbitration. These factors should be weighed carefully before entering into agreements which restrict dispute resolution to arbitration.

[Business Insights is hosted by the Law Firm of Kumar Pathak, LLC. ROY A. BANERJEE is a partner at the law firm of Kumar Pathak, LLC. His practice is focused on litigation and trial work in the areas of business law, real property Law, construction Law, and catastrophic personal injury including medical malpractice and wrongful death]


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