What Is Arbitration?

Arbitration is an alternative dispute resolution procedure parties can choose instead of going to court. Arbitration must be consensually chosen by both the parties—usually in the original contract between two parties. Any applicable law, language, and venue can be chosen for arbitration, and arbitration is generally considered a more neutral option in international trade. Most importantly, arbitration is confidential, which means that the details of the case are kept from public record and both parties can avoid public scrutiny.

During arbitration, parties present cases in a similar manner as they would in a court case to the panel of arbitrators who were chosen by the parties themselves by mutual assent. While arbitration generally proceeds in a less formal manner than a court case, each side has a chance to produce evidence, call witnesses, and give testimony, just like in a court case. Both parties generally are represented by arbitration lawyers who ensure that the case goes as smoothly as possible. Once each side has presented their case, the arbitrators debate and rule. Outcomes handed down by arbitrators are binding—although in some cases they can be appealed. 

Pros of Arbitration

There are many advantages to arbitration—a fact which has led to its growth in recent years. The following are some of the key pros of arbitration:

• Less hostility. Arbitration is generally considered to be less hostile than litigation, as parties are often encouraged to work together to structure the settlement—a benefit when your company wishes to continue the business relationship.

• Privacy. Arbitration proceedings and final settlements are generally confidential, which allows companies to settle disputes without added media scrutiny.

• Lower cost. While parties still generally have to pay for lawyers and must pay the costs of the arbitrators themselves, arbitration still usually costs less in the long term, because disputes can be settled more quickly and have fewer chances for appeals.

• Expediency. An average arbitration is settled in just over a year from filing to decision, while the same types of cases would take an average of three years—and almost always at least 18 months.

• Flexibility. Procedural rules in arbitrations are quite flexible—matters of evidence and witness lists can be approved in a brief phone call. Court procedures cannot be adjusted, however, which means they take much longer to settle. Plus, arbitrations can be scheduled around parties obligations, while courts give very little flexibility in terms of scheduling.

Cons of Arbitration

While often an appealing alternative, arbitrations also have many disadvantages that make them less appealing in certain situations. The following are some of the key cons of arbitration:

• Limited recourse for appeal. While most formal arbitration organizations do have some appeal options, most arbitration decisions are binding. It’s much more difficult to set aside an arbitration outcome than a court’s determination.

• More weighted in the favor of larger parties. Arbitration can sometimes favor the larger party more heavily, especially in cases that involve consumers. Arbitration is much newer and less public than court proceedings, and sometimes individuals can be overrun by more sophisticated parties with arbitration experience.

• Lack of transparency. Because arbitration is confidential, it lacks the transparency and safeguards that limit courts when making a decision.

• Rising costs (and uneven cost allocation). Although arbitration is currently less expensive than litigation, the rising costs of the arbitrators fees continue to climb. This is especially prohibitive to smaller companies and consumers, as even initiating a case costs quite a bit of money—and those costs will initially be borne by both parties.