Arbitrate or litigate?

The decision to arbitrate or go to court is core to the strategy in many contract negotiations and most commercial disputes.

If the dispute involves technical issues or a small amount of money, or if the parties want to preserve a relationship, arbitration may be better. If it involves a complex legal issue, the interpretation of a contract clause or of a law or regulation, or if the relationship is doomed, litigation may make more sense.

Because the dispute resolution method is often decided well in advance of any disagreement, the parties should consider the features of each method as early as possible.

Arbitration is informal. Although they have considerable discretion, judges are bound by rules of procedure and evidence. In arbitration, these relaxed rules of evidence may work for or against a party. A judge may not admit some crucial evidence and testimony in litigation, while an arbitrator in the same case might allow it.

The right to appeal is limited in arbitration. In court, the loser may appeal. Ordinarily, the loser has no such right in arbitration. Parties in arbitration should assume the award will be final.

Arbitration is generally faster and less expensive. An arbitrated dispute can be resolved in a matter of months. Arbitration proceedings may, however, drag out, hostage to arbitrator, attorney and witness availability. Litigation can take years, but once a hearing has started, it usually continues until it is completed.

Arbitration is not inexpensive. The parties pay arbitrators, court reporter and sometimes a facility charge. If an outside organization administers the arbitration, it levies fees proportional to the amount in dispute. Large, complex cases can generate high costs in addition to attorneys’ fees that the parties would incur with either approach.

The judicial process may promote settlement. A party’s litigation costs may exceed the value of the potential award. The possibility that both parties could end up with a net loss may be enough to bring them to the negotiating table.

At various points in the judicial process, they are required to discuss settlement, often with the judge’s help. This is rarely the case in arbitration. John R. McGinley Jr. is a trial lawyer and is in the Corporate Division of Eckert Seamans Cherin and Mellott. Reach him at (412) 566-6000.