Why Corporations Prefer Arbitration to Litigation (Part II)

By Dr. Gary Deel, Ph.D., J.D.
Faculty Director, School of Business, American Public University

This is the second of three articles examining the legal concept of arbitration.

In Part I, we discussed the concept of arbitration, its history and its various forms. We looked at some of the ways it differs from formal litigation and how it can be either binding or non-binding, depending on design by the parties.

In this second part, we will break down the steps involved in a typical arbitration proceeding and outline some of the caveats that arise with selecting arbitration for dispute resolution.

The Six Steps of a Typical Arbitration Proceeding

Although each proceeding may be handled in a slightly different way depending on the facts, circumstances, and disputants, there are some general steps which accompany every arbitrated dispute.

1. Agreeing to arbitrate. As discussed earlier, agreement to arbitrate can be achieved either by contract before a dispute arises or by an accord between the parties after the fact. If an arbitration agreement is reached beforehand, then the party wishing to raise a dispute need only invoke the arbitration option under the agreement. However, absent such an a priori agreement, both parties would need to consent to arbitration.
2. Selecting an arbitrator. After the arbitration agreement, an arbitrator must be selected. In some cases when the parties cannot agree on a single individual, an arbitration panel may be selected. The panel operates as a plurality, much in the same way the U.S. Supreme Court does. But arbitrators are usually paid for their work, so this is obviously a more expensive option for both parties; costs must be carefully considered.
3. Laying the ground rules. After an arbitrator has been selected, he or she and the disputants must decide on ground rules for procedure, evidence, and contingencies. The American Arbitration Association has established model rules to help expedite this process. The parties involved could also choose to create their own guidelines. As long as both parties agree to the rules, the arbitration setting is flexible to the desires of the stakeholders.
4. Preparing for arbitration. Depending on the rules established by the parties, preparation for arbitration will likely look very similar to the discovery stage of formal litigation: fact-finding by both parties, cooperation in terms of disclosure of relevant evidence, depositions, interrogatories, production of documents, and strategizing for effective arguments.
5. Participating in the process. Once preparation has concluded, both parties will participate in the process established by the agreed upon rules. This may or may not consist of hearings, presentation of evidence, witness testimony and other stages. Although arbitration is usually a quicker process than formal court litigation, it can still be just as procedurally complex.
6. Making an award. After the process has concluded, the arbitrator will issue the finding and award. This will occur either immediately upon the conclusion of the final proceedings or after a brief period of deliberation. The finding and award details may or may not include an explanation or reasoning for the arbitrator’s decision. Once the award has been declared, the losing party is responsible for making payment to the prevailing party within the terms set for time, amounts and any other conditions. If the loser should fail to do so, the victor may bring the arbitration award before a formal court for enforcement, in the same way that one would seek to enforce a contract commitment.

Arbitration carries with it some strong caveats. For example, unlike formal litigation, most arbitration decisions are not eligible for appellate court review, regardless of how arbitrary or capricious the decision may be.

Depending on the circumstances of a lawsuit, if a litigant loses in court the loser might have the option to appeal an unfavorable decision to a higher court for review and reconsideration. For example, in the federal court system there are district trial courts, and then circuit courts of appeals above them, and finally, the U.S. Supreme Court at the top of the hierarchy.

However, with formal arbitration the buck stops with the arbitrator and the decision is final. There is no appellate court to review an arbitrator’s finding.

Because the rules of modern arbitration are formalized and complex, it’s strongly advised to be represented by legal counsel. Many of today’s arbitration proceedings involve the technical navigation of formal processes such as the evidentiary rules of trial procedures. To be fair, there are some arbitration forums where disputants may represent themselves, where formal rules are relaxed, and where the arbitrator serves more of a facilitative than a judicial function.

But these are seldom the kinds of arbitration arenas that big businesses play in. Most of the time, large corporations impose arbitration that looks very similar to formal court litigation. And in these kinds of settings, those who hire attorneys incur a substantial additional cost for the support.

As an attorney, I can attest to the need for expert legal skills in modern arbitration and to the significant price tag commonly attached to those skills. Those who choose to forego the cost of legal representation may save some money, but they put themselves at a tremendous disadvantage in the process.

In spite of the drawbacks, arbitration is still the preferred method of dispute resolution for corporate America. But in light of all these caveats and considerations, the question is why companies today are so insistent on trying to avoid litigation with arbitration in the first place. In the final part of this article series, we’ll examine why arbitration is so appealing to large businesses.

About the Author 

Dr. Gary Deel is a Faculty Director with the School of Business at American Public University. He holds a J.D. in Law and a Ph.D. in Hospitality/Business Management. He teaches human resources and employment law classes for American Public University, the University of Central Florida, Colorado State University and others.