Included in the terms of almost all of your contracts is a dispute resolution clause. Although it’s often considered “just another unimportant boilerplate provision” that makes your eyes glaze over, it’s far more important than you might think. Whether your contract with your customers (and, of course, with your suppliers) requires all disputes to be arbitrated (and under what terms) can substantially impact the overall outcome of your dispute. That’s why it’s important to consider both the advantages and disadvantages of arbitration as compared to those of traditional litigation when negotiating your supply agreements. Some of the key factors to consider include the following.
Time to Completion:
One of the oft-touted benefits of arbitration is that it results in a final determination more quickly and efficiently than litigation. Although this is sometimes true, that’s not always the case. How quickly an arbitration proceeding is completed depends on a number of factors, including the agency and its arbitration rules, the complexity of the matter, the conduct of the other side and the arbitrator.
Certain arbitration agencies will impose tight timeframes for arbitration proceedings to be completed, sometimes in as little as six months from the initiation of the proceeding. Others, however, will not impose any particular timeline and will allow matters to extend well over a year. This makes the timing of arbitration similar to that of a traditional lawsuit, excluding, of course, the substantial time that the appeal process (which generally does not apply in arbitration) can potentially add to litigation.
In some situations, because of the somewhat differing concerns and motivations of arbitrators as opposed to judges, as discussed below, litigation through the court system may actually prove to be faster and more efficient than arbitration.
Cost:
Arbitration usually involves limited discovery (i.e. interrogatories, depositions and the like) by which each party obtains information and documents from the other party related to the dispute, making it more streamlined than litigation and considered to be more cost effective than litigation in a court system, where the expense of liberal discovery can be tremendous. Of course, the lack of robust discovery can be a substantial disadvantage of arbitration, as parties may find themselves flying blind during the hearing.
And while there are potential cost savings with respect to discovery, it is important to remember that, unlike litigation, arbitration often requires substantial filing and advanced administrative fees — typically in the thousands or tens of thousands — at the outset, as well as significant daily or hourly fees for the arbitrator’s (or arbitrators’ ) time. So, for matters that resolve early, arbitration, because of its upfront costs, can prove to be far more costly than traditional litigation.
Additionally, as is discussed below, arbitration can sometimes take more time to complete and can be more expensive than litigation, due to varying driving factors of arbitrators and judges.
Decision-Maker:
A judge and an arbitrator make decisions differently, which can change the course of a dispute. This could impact the timeline and overall expenses involved in working towards a resolution. When deciding between litigation and arbitration, it is important to consider these factors.
The parties generally select an arbitrator together or have substantial input in appointing one for their case. In fact, some arbitration agreements include precise arbitrator qualifications to ensure a certain level of experience and expertise. An arbitrator may not only have more expertise in a particular area, but also more time than a judge who may be juggling a civil, criminal and family law docket. More expertise and time to devote to your matter should arguably result in a better, more efficient outcome.
That’s not always true, however. Because most arbitrators know that their decisions are typically final and binding, they tend to allow the parties more leeway with respect to changing their claims and arguments. In addition, for that same reason, they often loathe disposing of part or all of a matter before having the final arbitration hearing (similar to a trial). Judges, on the other hand, are generally more inclined to make those types of decisions and to dismiss claims as soon as possible. In the end, the arbitrator’s hesitance can lead to parties waiting longer and spending much more to get a decision.
Additionally, while most arbitrators are motivated by achieving the right result, many, who are paid by the hour or by the day, have a financial interest in continuing to work on an arbitration, and in particular, in seeing an arbitration proceeding go to a final hearing, which is where the bulk of the arbitrator’s fees are earned. That could place their own interests before the parties’ in reaching an efficient resolution.
Of course, there is also the issue of who ultimately acts as the fact finder. In arbitration, the arbitrator not only hears and decides issues and arguments raised by the parties before the final hearing, but also acts as the ultimate decision-maker at the final hearing. In litigation, except in certain circumstances, the parties typically can have their case heard and decided by a jury if they desire. A jury trial can be a substantial benefit over arbitration where a party’s narrative of their case is more “jury friendly,” in that it is understandable, appeals to emotion or notions of fundamental fairness. If the issues in a case are complicated or technical, a jury trial may not be the right option. As such, parties should attempt to understand ahead of time the types of claims that could arise in their particular situation – those they might assert and those that might be asserted against them – when considering whether or not to agree to an arbitration clause.
Procedures:
Arbitration is a much less formal process than a traditional court proceeding. Not only is the physical setting of arbitration (most often a conference room) less formal than litigation, but so are the applicable procedures. In litigation, judges are constrained by the rules of evidence and, of course, by precedent based on prior cases. This helps to ensure that judges do not substitute their opinions of what is fair and just in place of what the law allows or requires and promotes relatively consistent (and predictable) outcomes of similar issues. But, it can also mean that sometimes relevant and probative information is precluded from consideration by the fact-finder (i.e. the judge or the jury).
Arbitrators are not placed under the same restrictions as judges, which means that arbitrators are not bound to follow precedent or to exclude evidence. Rather, arbitrators have significant discretion as to what evidence can be submitted and, thus, can consider key information that would not be admissible in court. They are also able to exercise their discretion to make decisions without being bound by precedent if they believe another outcome is appropriate.
These advantages, however, can also be disadvantages. The informal arbitration procedures and the largely unchecked discretion of the arbitrator could result not only in increased time and costs as discussed above, but could also prevent the parties from being able to assess the likely outcome of their case.
Finality:
In litigation, getting a judgment after a jury verdict or the judge’s decision is not necessarily the end of your journey. Either or both parties can appeal the trial court’s or jury’s decision. Of course, if you’re on the losing end of the trial court’s decision or the jury’s verdict, then the ability to appeal and seek a different outcome is a major relief. But, if you’re pleased with the result at the trial court level, the possibility that the other party could appeal, not only means a potentially different outcome for you, but a lot more time and expense as a case can take years to work its way through the appeal process.
Arbitration, however, is far different. Once rendered, arbitration awards are typically final and binding. Although an arbitration award can be challenged in court, an award will be vacated only in extremely rare and limited circumstances, such as where the award was procured by fraud or where the arbitrator has exceeded his or her powers. In the vast majority of situations, courts will enforce arbitration awards, even where the arbitrator has made a serious legal error. As such, while arbitration could offer absolute resolution once the arbitrator renders his or her award, it lacks the important procedural check on the discretion of the decision-maker and the outcome of the dispute that the appeal process provides.
Confidentiality:
Different from litigation, arbitration proceedings are not open to the public and because arbitration is conducted pursuant the agreement of the parties, the parties can, and often do, agree to keep the entire arbitration and all related information and documents confidential. Thus, in arbitration, the parties are able to mitigate the potential negative impact that disclosure of an adverse outcome might otherwise have on the affected party.
Court proceedings, on the other hand, generally cannot be kept confidential from the public and often involve time-consuming procedures to ensure that confidential information and documents related to the parties’ dispute are accessible by the court, but not the general public.
Given that disputes within the automotive supply chain often involve highly proprietary and confidential information and, perhaps more importantly, could have immense implications if known throughout the industry, the privacy offered by arbitration is a crucial consideration to keep in mind.
The Right Choice:
As you can see, both arbitration and litigation have their pros and cons. The preference depends on the business relationship at issue, the type of dispute that is likely to arise (or already has arisen), and, most importantly, your company’s concerns, priorities and goals. Before simply passing over the dispute resolution clause, consult with your attorneys to determine the right choice for you.