When company disagreements get serious enough that lawyers are hired, the next step is often a lawsuit. But even when parties disagree so deeply that they’re headed to court, it’s still worth trying to agree on just one thing: to litigate the dispute in binding arbitration rather than court.
Why arbitration rather than court? There are lots of reasons, but first, for clarity, binding arbitration is different from mediation. Mediation just means that everyone agrees to sit down with a neutral party to negotiate a settlement. Mediation can be incredibly valuable, but if the parties still can’t see eye-to-eye, everyone walks away in the same place that they started. Arbitration, by contrast, is just private litigation. An arbitrator has all the powers of a judge and jury and courts will generally enforce an arbitrator’s decision once issued.
Why would anyone pay for a private judge when the public courts are essentially free? Because it’s often good for everyone. First, business people often not only want to prevail on their dispute, but they also want certainty. Arbitration proceedings come with no appeal rights, so whoever wins, wins. Second and closely related, arbitration proceedings are much faster than public courts. Public judges often have dozens or hundreds of active cases on their dockets, while an arbitrator may well be working on only the presently pending case. That means that parties get a decision in days or weeks, instead of months or years.
The rules in arbitration also offer a number of advantages. For one, most arbitration rules provide for only limited discovery. Anyone who has been involved in litigation knows that discovery is often slow and, more problematically, very expensive. Unlike ordinary court rules, arbitration rules often permit only one deposition, and contemplate more limited document discovery. Likewise, arbitration rules tend to be fairness focused, not formality focused. So there is less concern that a party will default for failing to check some box when serving a complaint, and more likelihood that the arbitrator will use common sense to decide procedural questions.
Parties that agree to arbitration do have to pay an arbitration organization—two of the largest are JAMS and the American Arbitration Association (AAA)—but even that has an upside to it. Federal judges have life tenure and state judges often serve long terms in office, so sometimes public judges are less responsive and reasonable than ideal. Arbitrators, on the other hand, have a monetary incentive to be reasonable: if an arbitrator develops a poor reputation, no one will hire him or her. Many arbitrators are themselves retired judges, so parties still benefit from that wealth of knowledge, but also know that the arbitrator has reason to treat all parties well.
Finally, arbitration is private. Lawsuits, by contrast, are eminently public affairs. Except when a court expressly rules otherwise, anybody (including the press) can read every filing submitted to the court. If a dispute requires hearings or goes to trial, anyone can come to watch. Parties to arbitration, on the other hand, don’t file their pleadings publicly, and often agree with one another not to release information about the dispute. That means that dirty laundry stays indoors, instead of flying where everyone can see it.
Of course, arbitration only happens when parties agree to it. The most common way that parties agree to arbitration is through a clause in the contract that the parties later end up fighting about. A party that agrees to arbitration that way generally can’t nullify that agreement later. But even without an arbitration clause, the option is still a good one, and one worth considering even when relations with the other party have frayed. Arbitration can benefit everyone, and everyone should consider it before filing in court.