What is the Difference Between Arbitration and Litigation?

What is the Difference Between Arbitration and Litigation?

At its most basic level of divergence: Litigation is public and Arbitration is private, not unlike the difference between the United States Postal Service and FedEx. Both provide dispute resolution, but the private one allows you to spend more on better (or at least faster) service.

Litigation is the default setting for dispute resolution. If the parties to a dispute cannot agree to a certain type of dispute resolution, litigation in a public court of law is always an option. This is because either party may commence litigation in a public court of law against another party with or without that other party’s permission. For arbitration, the parties must first agree to resolve their dispute before that specific arbitrator for the arbitration can be legally binding.

Price:

To commence litigation in a public court of law, you will need several hundred dollars in filing fees. After that, the judge’s time, the clerk’s time, the bailiff’s time, the jury’s time are all free. The largest expense you will likely have will be the time of your attorney. In arbitration, you pay for the bureaucracy. In commercial litigation, the two main organizations that provide arbitration services are the American Arbitration Association (AAA) and the Judicial Arbitration and Mediation Services, Inc. (JAMS).

AAA’s fee schedule for construction litigation can be found here. AAA has a sliding scale for filing fees and final fees that can range from around $925 up to $7,700 and potentially more depending on the value of the claim. JAMS’ fee schedule can be found here. JAMS charges $2,000 to $3,500, depending on the number of parties to the arbitration, plus a percentage fee of what the arbitrators ultimately charge. The administrative fees within AAA and JAMS fee schedules do not include the actual cost of the arbitrator(s).

The arbitrator(s) have their own rate and it is generally safe to assume that will be around the cost of an experienced attorney and/or retired judge. Think around $600/hour. If there is a panel or arbitrators involved, each arbitrator will likely be charging their own hourly rate. Finally, don’t forget you have to pay your own attorney on top of that as well. So, if arbitration can be so expensive relative to litigation, why do it?

The same reason you would send a letter by FedEx as opposed to the United States Postal Service. You want better, faster, more reliable service. Now, whether arbitration provides better or more reliable service than litigation is variable. Quality of service depends on the individual arbitrator or judge. I don’t have to throw stones at anyone in order to make the general statement that arbitrators, just like judges, can be either good or bad.

What can be said is that, however their decisions turn out, arbitrators are more final than judges. The decisions of judges can be appealed to higher courts and the standard for overturning their decisions is much lower. An appellate court may turn over the order of a trial court judge for a multitude of reasons, the most common one being that the trial court judge made a mistake in applying the law. The avenues to overturn awards granted by arbitrators are much higher.

Essentially, the Courts will vacate such awards only if it is proved that the arbitrator rendered its decision by corruption, fraud or misconduct etc. Simply being wrong is generally not enough to vacate an arbitration award. So, in conclusion, arbitration is quicker than litigation because the parties are paying for the bureaucracy, and thus the arbitration bureaucracy is more motivated to move along the process in order to make more money, and the result of an arbitration is less likely to be overturned via appeals to the appellate courts.

Litigation is public and the Court needs to be proactively persuaded to seal the record therein. In contrast, Arbitration is private and a sealing of the record is far more commonplace. In more personal areas of the law, this is a major concern, but as this blog mainly concerns itself with commercial litigation, that is disputes between businesses, it is less important. The outcomes of our cases rarely make the gossip pages. For that reason, I purposefully gloss over this section, only to point out that it exists.

Given the above, what is the correct strategy: Arbitration or Litigation? Very very generally speaking, if you are the party that is owed money, if your paperwork is in order, and if you have the budget to withstand a bill that may escalate quickly, taking part in a prompt arbitration may be advisable. On the other hand, if you are a party that might owe money, if your paperwork is not in order, and if you have budget constraints, the delay of litigation may be the better avenue. And in all cases, consultation with an experienced attorney before making the decision between arbitration and litigation is strongly advised.