In contract disputes, parties can usually go to court, but contract terms can mandate arbitration through a “dispute resolution” clause.
Once agreed, parties typically can’t sue each other, as courts enforce arbitration clauses when agreed upon voluntarily.
Choosing between arbitration and litigation depends on the contract’s nature, industry norms, and preferences.
Consider these six key differences between litigation and arbitration before deciding on an arbitration provision:
Litigation tends to be expensive. Arbitration, not as much.
Litigation is costly due to various factors, including lawyers’ extensive paperwork, expert witnesses, and external consultants.
Parties bear these expenses, including their employees’ and executives’ time during discovery.
In contrast, arbitration is typically less expensive because of limited discovery.
This reduces opportunity costs and employee involvement. Arbitration also involves fewer filings, responses, and hearings compared to litigation.
Litigation is almost always public. Arbitration is almost always private.
Lawsuit filings are typically public, potentially leading to damaging publicity and the exposure of confidential information. Some plaintiffs use lawsuits to apply pressure in both legal and public opinion.
However, in certain disputes like contract disputes, public litigation can harm both parties’ reputations and finances.
In contrast, arbitration is almost always private, with no public records or filings, minimizing the risk of public scrutiny and reputational damage.
Litigation normally moves at a glacial pace. Arbitration moves faster.
Litigation often moves slowly due to court congestion and lawyers’ tactics. Lawsuits can take 18 to 36 months to reach trial.
Arbitration is typically faster, with main hearings within a few months.
It has less formal procedure, reducing potential delays from competitiveness.
Litigation is appealable. Most arbitrations are not.
Litigation can drag on due to appealable decisions, leading to more time and costs.
Appeals introduce uncertainty as courts may rule partly for both sides. Parties may have multiple attempts for a favorable decision, prolonging the process.
In contrast, most arbitration decisions are binding and non-appealable.
While this offers finality, parties lose the chance to challenge a third-party decision unless they agreed otherwise or can prove bias or fraud. This results in quicker dispute resolution.
Litigation is unpredictable. Arbitration, less so.
Litigation can be unpredictable due to various factors like assigned judges, juror unpredictability, and complex issues.
Arbitration, on the other hand, offers more predictability.
Parties often select arbitrators, who may have industry-specific experience.
Arbitrators are incentivized to make fair decisions, as their reputation and future job opportunities depend on it. This results in a more focused and predictable resolution.
Litigation is rigid. Arbitration is flexible.
In litigation, parties can’t select their judge, must follow set procedures and rules, and accommodate the judge’s schedule.
Arbitrations, however, offer flexibility. Parties often choose arbitrators and can select arbitration rules. They can adjust rules and procedures, including discovery, and decide on the location and timing of arbitration meetings.
When negotiating a contract, parties should weigh the pros and cons of litigation and arbitration to decide the best dispute resolution method for their specific situation.