Arbitration vs. the Courts: Which is Better for You?
One of the most frequently asked questions that I get from my commercial clients who are crafting restrictive covenants (i.e., non-compete and non-solicitation agreements) for their on-boarding employees and independent contractors is "In the event that a dispute arises between the parties, where should they be handled - before the courts or in arbitration?"
An alternative question I get approached with rather often is after the parties are on the verge of litigation, and their agreement has a provision requiring the parties to submit their disputes to arbitration (in legalese, a "mandatory arbitration clause"), and it typically goes along these lines:
"Is going to arbitration a good thing or a bad thing for me?"
Putting aside, for the moment, that in the second case, whether it's good or bad for you is already a moot question (by that time, it's already been determined that the dispute must be arbitrated), the truth is that there is no one size fits all answer to these questions; it depends on a host of factors, some of the more prominent of which are summarized below (this list is by no means exhaustive), and nearly all of which can cut both ways.
The Pros and Cons of Arbitration vs. the Courts
|Expedited/limited discovery process||More extensive, time-consuming discovery process|
|Evidentiary rules are relaxed||Strict adherence to rules of evidence|
|May need to separately apply to court for injunctive relief||Applications for injunctive relief (where warranted), are readily available as part of a standard lawsuit|
|Not inherently obligated to follow jurisdiction's laws||Must follow rules/laws of the jurisdiction|
|No appeals||Appeals as a matter of right|
|Arbitrators can be selected based on expertise in area of dispute||With certain limitations, e.g., commercial division matters as opposed to medical malpractice cases, judge assigned to your case by lottery system|
|Depending on contract, may be heard by up to 3 arbitrators - all of whom are paid for their time at an hourly rate||Judges are salaried, and not paid by the parties; cases heard by a single judge or, if tried, may usually be heard by a jury of the parties' peers|
|Depending on amount in controversy, filing fees may go up significantly||Filing fees are fixed|
|If losing party doesn't honor award, prevailing party must file in court to confirm the award to convert award into enforceable judgment||At the conclusion of each case, a judgment is rendered in the prevailing party's favor|
|Other than extreme circumstances of, e.g., fraud or manifest bias, very difficult to overturn arbitration award in court||Errors of fact or law by the trial court can be reversed on appeal; extreme circumstances of fraud or bias not needed to overturn an adverse judgment|
At the risk of stating the glaringly obvious, this chart does not - and cannot - cover comprehensively the nuances in determining which venue would be better for every case. That being said, and assuming all other factors are equal (a study conducted by the New York Times a number of years ago suggested that arbitration led to many random, seemingly biased results with no realistic possibility of appeal), it would seem that arbitration before a single arbitrator with specialized knowledge in that area of business would be a solid choice for parties that seek the expeditious resolution of a straightforward, simple dispute.
On the other hand, where you anticipate that you will need greater predictability regarding what factual discovery and evidence will be allowed, or how certain legal issues will be decided, (or injunctive relief may be needed), the court system is probably a better way to go, if for no reason other than to protect a party's appellate rights to make sure the case is determined in accordance with established principles of law.
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