The Benefits and Drawbacks of Arbitration

Couple at an arbitration meeting across table from an arbitrator
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Arbitration is a form of alternative dispute resolution where the two parties agree not to take their dispute to court. Instead, they agree to resolve the dispute by hiring an arbitrator to hear both sides. Arbitration is used in labor disputes, business and consumer disputes, and family law matters. Most contracts include an agreement of both parties to the arbitration process.

Who Represents You in Arbitration

In arbitration, the two sides are not usually represented by an attorney. An arbitrator is selected, and both parties have an opportunity to present their side of the situation. The rules of evidence do not apply. 

The decision of the arbitrator is final, and no appeal to the arbitrator's decision is possible. Many consumer, franchise, employment, and other business contracts include an arbitration clause; some of these clauses require mandatory arbitration.

Benefits of Arbitration

Advocates of arbitration claim that it has benefits over litigation (going to court). The speed and informality of the arbitration process are claimed to be a major reason why many businesses select arbitration over litigation. In many cases, arbitration can be a shorter process, and if no attorneys are needed, it can be less costly. 

The two parties to the arbitration have control over the selection of the arbitrator, as compared to a court case where the judge and jury selection is out of the hands of the two parties. 

Also, Arbitration is a less formal process, which makes the process move faster. Arbitration hearings are private, and the results are not part of the public record. The Oregon Judicial Department says, "Sometimes if the parties want, arbitrators can decide things that judges are not allowed to decide." 

Drawbacks of Arbitration

One drawback to the process is the lack of a formal evidence process. This lack means you are relying on the skill and experience of the arbitrator to sort out the evidence, rather than a judge or jury. No interrogatories or depositions are taken, and no discovery process is included in arbitration.

The lack of a formal appeals process and the—usually—binding nature of the process also draws detractors. If you are a party to binding arbitration and you want to protest the decision of the arbitrator, you may not be able to do so unless there is some reason to believe the arbitrator acted with malice or was biased.

Mandatory arbitration clauses in consumer contracts, employment contracts, and nearly every online agreement that you click "Accept" often work in favor of the company rather than the employee or consumer. 

Arbitrators may not be unbiased. If an arbitrator has a history of siding against one side in a dispute, that arbitrator may not be chosen, against one who has a history of being impartial to either side. 

Finally, the fact that arbitration hearings are not public may put one side at a disadvantage. 

Is Arbitration Better Than Litigation? 

The common wisdom you hear often is that arbitration costs less. But that's not necessarily true. Many companies get attorneys to help them with the arbitration, and the cost of an arbitrator can be high. One study, done by Corporate Counsel, showed that, in 19 cases, arbitration was more expensive than litigation, and the median time for arbitration was two months longer than in comparable litigation cases. In many of these cases, the case was settled out of court, shortening the time and saving a good deal of money. Arbitrators, on the other hand, are reluctant to "settle" before hearing both sides. 

If you are considering putting an arbitration clause in a contract, or if you are faced with having to sign a contract with an arbitration clause, consider these benefits and drawbacks in making your decision about whether to arbitrate.