To Litigate Or Arbitrate?

June 30, 2011 Robert Garson

The choice of dispute resolution forum should be of high importance to all parties because of the potentially vast differences in procedure, and even outcome, offered by the various dispute resolution bodies.

In most cases, the choice comes down to litigation or arbitration.

What is the difference?
Litigation involves using the relevant State and Federal courts to resolve all matters considered “disputes” under an agreement. Unless the parties expressly agree to resolve their disputes by another means, litigation will be the default dispute resolution mechanism.

Arbitration involves the parties’ express agreement to have any dispute resolved by an agreed-upon third person or institution. Put simply, you cannot arbitrate unless there is an agreement to arbitrate. Institutional arbitration is the most common form of arbitration, that is arbitrations which take place under auspices of an existing organization, such as the American Arbitration Association (“AAA”), the International Chamber of Commerce or FINRA.

Both litigation and arbitration have pros and cons and, typically, there is no “one size fits all” model which will automatically tell you which method will be better for you in any given case. So, let’s run through some of the common considerations parties weigh up when selecting a dispute resolution method:

Speed: In general, an arbitration will likely be concluded in less time than a litigation. This is due to Courts typically having a larger caseload and more in-built pre-trial procedures which can delay cases.

Cost: Proponents of arbitration often tout arbitration as being more cost-effective than litigation. This claim is not always true as there are out-of-pocket costs inherent in arbitration, such as arbitrators’ fees (usually an hourly rate commensurate with the arbitrator’s experience as a professional), institutional fees (often calculated as a percentage of the overall claim) and venue fees, which are rarely, if ever, incurred in litigation.

Right of Appeal/Binding or Non-Binding: In most instances, there is at least one right of appeal from cases heard in State and Federal courts. In arbitration, unless the parties agree otherwise, there is generally only very limited rights of appeal (for example, fraud or bias in the conduct of the arbitration).

Decision-maker: In litigation it will be a judge who has been elected or appointed in the relevant jurisdiction who will almost always have a legal background. In arbitration, the parties have more freedom to choose the arbitrator(s). For example, a party commencing an arbitration with the AAA can nominate the desired qualifications of the arbitrator on the “Demand for Arbitration.” The parties may also choose to appoint a specific arbitrator by name in their agreement.

Application of law: As you would expect, judges are required to follow and apply all rules of evidence and relevant case law and Court rules. The failure to do so presumptively gives one party a right of appeal. Arbitrators, typically, are not bound to do the same (and the failure to do so is not a ground for appeal).

Enforcement: In the United States, there is usually little difference between enforcement of a litigation judgment and an arbitration award. An arbitration award must be converted into a judgment, which is often a simple procedural step, at which point it has the effect of being a judgment. A party who opposes converting an award into a judgment, has a high burden of proof to satisfy. Conversely, a party aggrieved with a judicial judgment usually has at least one “of right” right of appeal.

So, why arbitrate? Parties choose to arbitrate for a number of reasons, for example:

  • a non-US company enters into an agreement in the US, but is not familiar with the US court system;
  • the agreement between the parties involves specialist or industry-specific subject matter and the parties feel more comfortable being able to either directly choose an arbitrator, or set parameters on who may arbitrate;
  • arbitration is generally more private than a litigation; and
  • an arbitration is generally more time-efficient than a litigation.

So, why litigate? Alternatively, parties often prefer litigation to arbitration because:

  • of familiarity with the relevant Court’s procedures;
  • there is usually a guaranteed right of appeal;
  • Courts are better placed to issue urgent relief in the form of injunctions and temporary restraining orders (for example, freezing assets); and
  • Judges are bound to apply the rules of evidence and follow all relevant case law and Court rules.

Choosing between litigation and arbitration is an important decision. We here at GS2Law have ample experience in State and Federal Courts, as well as in both institutional (AAA, ICC, FINRA, Beth Din) and ad hoc arbitrations, and can assist you if you have any questions or concerns about such a decision.