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Pros and cons of arbitration in business disputes

When your business faces a dispute, you may dread the anticipated time, energy and resources to spend on reaching a resolution. Fortunately, a contract dispute, partnership disagreement and more do not always have to resort to litigation.

Many California businesses prefer arbitration over litigation in resolving a conflict. An alternative dispute resolution (ADR) method, some contracts require mandatory arbitration to resolve future disputes. Whether the decision to attempt arbitration was previously determined or agreed upon by both parties, there are several benefits and drawbacks to consider.

The benefits of arbitration

More informal than litigation but more formal than mediation, arbitration consists of both parties, potentially their attorneys and a neutral, third party arbitrator. The arbitrator listens to the positions of both parties before ultimately coming to a decision. Unlike mediation, the decision of the arbitrator is often binding.

Benefits to arbitration include:

  • More control. In arbitration, both parties have the opportunity to present their own arguments as well as have input in choosing the arbitrator.
  • Quicker and less expensive. The informality of the process can lead to both a quicker and overall less costly decision.
  • More privacy. Unlike litigation, the hearings and transcripts of arbitration remain private and separate from public records.
  • Fairer. Because both parties have input in the selection of the arbitrator, the process can remain fair for both sides.

Both sides can ultimately benefit from being able to communicate in a more informal setting with the potential to preserve the business relationship.

Drawbacks to consider

As with mediation and litigation, arbitration also has its cons. Firstly, arbitration lacks the formal evidence process present in litigation. According to The Balance, without depositions or a discovery process, both parties must rely instead on the skill and judgement of the arbitrator to sift through the relevant evidence of the case.

Additionally, some cases may be unable to reach a swift resolution. While arbitration has the potential to be quicker and less expensive than litigation, it also has the potential to take longer and cost more. This can especially be the case if the parties are unable to reach a resolution and agree to take the case to court instead.

It should also be noted that with arbitration, there is generally no right to appeal.  That means that the parties both to some degree take the risk that the arbitrator will come to a surprising result in light of existing law.

While arbitration can be both beneficial to and successful for many businesses, some issues may still be better suited for litigation. Discuss your options with an attorney to determine the most optimal resolution method for you.

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Lawrence R. Jensen & Associates
95 S. Market St.
Ste. 550
San Jose, CA 95113

Phone: 408-465-0293
Fax: 408-899-2403
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