Clients frequently ask whether they are better off litigating or arbitrating a dispute. The answer is generally that "it depends." Except in the international context, where enforceability considerations come into play, to a great extent both the advantages and disadvantages of arbitration arise from the same sourcethe abbreviated nature of the proceedings and the unavailability of appellate review of the merits of the arbitration award.
Enforceability Trumps All
In the international context, there is one critical and often overriding criteria that determines the choice of arbitrationenforceability. Over 140 nations are signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the New York Convention). Signatories agree to enforce arbitral awards rendered in signatory nations without court review on the merits. Awards may only be set aside by the courts of the rendering country, and awards may be refused enforcement in signatory countries only on very limited due process type grounds.
By contrast, there is no multilateral treaty on the enforcement of foreign judgments to which the United States is a party, so U.S. judgments generally would be enforced in other countries only on the basis of "comity." Such enforcement attempts do not preclude (and often entail) substantive review on the merits by the enforcing court. Thus, unless the foreign party has substantial assets in the United States, enforcement against them of a U.S. judgment could be challenging.
Other Key Considerations
Abbreviated Proceedings. Most well-drafted arbitration clauses provide for an arbitration procedure that should take less time and involve a lower cost than litigation. Litigation can take years and, in the worst case, attorney fees and costs can be substantial. Arbitration is generally faster and involves more limited attorney fees, particularly with a clause that provides for expedited proceedings. However, with complex disputes, it may be necessary to have a much more extended timetable, increasing the total costs. Although the arbitrator, unlike a judge, will receive hourly compensation from the parties, this additional cost likely will be offset by a reduction in other costs resulting from the limited scope and duration of arbitral proceedings.
Limited Motion Practice. There is generally little or no "motion practice" in arbitration, although the arbitration clause may provide for such. Motions to dismiss and summary judgment motions, which can require extensive (and expensive) briefing, generally are not part of an arbitration. On the other hand, such motions have the potential to resolve a meritless case early on, prior to a hearing on the merits. Although some arbitrators may permit such motions, most are reluctant to resolve a case based on summary proceedings.
Limited Discovery. Disclosure is also generally limited in arbitration. Although most arbitration rules allow for some disclosure, it is often confined to the production of specific documentary evidence for which a party has a demonstrable need. Further, absent agreement of the parties, provision for depositions in the arbitration clause or extraordinary circumstances, discovery will rarely include depositions. This will save substantially on costs and attorney fees, but in cases where deposing certain witnesses could be crucial to a party's case, it may also prove to be a disadvantage. On the other hand, when an arbitration clause either provides for extensive discovery or is silent and the parties' counsel agree on extensive discovery, it is often difficult for the arbitrators to countermand the parties' (or their counsels') agreement, resulting in an arbitration that is as lengthy and expensive as full-blown litigation.
Finality. By agreeing to arbitration, a party chooses a system that lacks many of the substantive and procedural protections provided by court systems. Formal rules of evidence generally do not apply in arbitration. Although the arbitrator is obligated to follow the arbitral rules chosen by the parties, such rules are far more limited in their scope than those that govern courtroom procedure. Moreover, in non-administered arbitrations, the arbitrator generally determines if a procedure is being properly followed. Even in the case of administered arbitrations, there is very limited recourse to the administering authority with regard to procedural issues. Unless a procedural violation is egregious (e.g., not allowing a party an opportunity to present its case) it is unlikely that an award will be overturned by a court for minor procedural violations.
Moreover, absent evidence of fraud, corruption, bias on the part of the arbitrator, lack of due process, or failure of the arbitrator to comply with the arbitral agreement, most arbitral awards generally are routinely upheld by courts. Additionally, absent "manifest disregard of the law"1 where an arbitrator is made aware of but consciously disregards the undisputed governing law, most arbitral awards are unreviewable on the merits, even if the arbitrator misunderstands or misapplies the law. Such finality has the advantage of avoiding costly and lengthy appeals, but can be frustrating for a losing party in a case where an arbitrator is plainly wrong. Therefore, in larger dollar value or potential "bet the company" disputes, it is generally advisable to have a three-arbitrator panel that will be less likely to render an "off the wall" award.
Expertise. Unlike a judge, an arbitrator need not be an attorneyhe or she may, if the parties desire, be an expert in a particular field with no legal training at all. Depending on the dispute, an expert may be more or less competent than a courtroom judge to reach an appropriate decision. Attorneys with particular expertise may also be specified in the criteria for arbitrators, although parties should not be overly-specific so as not to overly limit theirs choices when a dispute arises.
Confidentiality. Arbitration offers confidentiality of the proceedings. With certain types of claims, one party may prefer to try its case in the court of public opinion. Arbitration proceedings are generally confidential, and additional confidentiality safeguards may also be added.
Therefore, except in international proceedings where enforceability may be an overriding concern, the decision of whether to choose arbitration over litigation will depend on many factors that should be carefully considered by the prospective parties and their well-informed counsel.
Rona G. Shamoon, chair of the Dispute Resolution Section, is a litigator at Skadden, Arbs, Slate, Meagher & Flom and a member of the firm's international arbitration group.
1. Jock v. Sterling Jewelers, 646 F.3d 113, 121-22 (2d Cir. 2011), cert. denied, 646 F.3d 113, S.Ct. (2012).