“Litigate or Arbitrate” Is a False Dichotomy

In-house counsel who bring open minds to managing their companies’ dispute resolution processes can save their clients considerable time and money. Too often, I’ve heard lawyers wonder during contract drafting whether they should designate courts or arbitrators to referee legal fights with vendors, customers, employees, or other business partners. Fortunately, the answer isn’t one or the other.

For existential problems, my experience shows that courts often are the best deciders. These are “bet-the-company” matters over, for example, critical intellectual property or huge sums of cash. Courts allow parties as many motions and as much discovery as the rules permit, followed by appeals. No legal stone goes unturned.

Lesser matters can be resolved more efficiently through alternative dispute resolution (ADR), usually arbitration. In-house counsel must remember that since contracts determine these designations, they can tailor the terms so that major disputes go to court and routine claims go to ADR. Reviewing contracts, whether after starting a new in-house position or engaging in the healthy habit of document maintenance, is an opportunity to make these critical choices that could limit the pain in upcoming, inevitable legal disputes.

Arbitration Fallacies

Although courts vary by jurisdiction, arbitration providers can differ more broadly. Counsel should assess them carefully to see if they meet their needs. They also should be aware of the truth behind some fallacies about arbitration.

A common perception about arbitration is that it can be just as onerous as court litigation, weighed down with protracted discovery and endless motion practice —all at a higher cost because parties pay hourly fees to the arbitrator or, even more expensive, a panel of arbitrators.

While it is true that some arbitration processes are nearly identical to courts, with the only difference being that the dispute remains private, this is not always the case. Because arbitration is contractual by nature, parties can generally agree to whatever rules they want to make the process more efficient (subject to a few limitations). Arbitration forums likewise vary significantly in their willingness and ability to provide different, and at times streamlined, procedures. This is a reason counsel should assess providers before designating one as their go-to forum for a particular contract.

Similarly, while arbitration providers are paid fees from parties, counsel should research forums that have alternative arrangements to hourly fees. Some providers may be willing to engage in a flat fee system or even default to one that works better for a company and its business partners.

One of the underestimated benefits of contractual arbitration is that when parties agree to an arbitration forum or define a set of rules that address and conclude a dispute with expediency and pragmatism, relationships between the parties are far more likely to withstand the process. This helps a company, its vendors, customers, and business partners by limiting distractions and clearing the way to resume doing business together.

“Split the Baby”

Another mistaken belief about arbitrators is that they tend to just “split the baby” to avoid making tough decisions about which side in a case is right. The argument is that arbitrators are accountable to the companies that pay their fees, so they don’t want to lose business by ruling against their customers.

First, most arbitrators and judges I know do their best to be fair and make legally correct decisions.

Secondly, arbitration is evolving from primarily localized businesses to a much grander, more diverse, and more sophisticated industry, employing video conferencing platforms and other technology to engage parties around the country and worldwide. This means they are under far less perceived pressure to keep everybody around them happy, and they do their jobs and make decisions effectively.

Arbitrators on Repeat

I’ve heard of lawyers complaining that they land before the same arbitrators too often. This could happen depending on the size of an arbitration provider’s bench or where arbitrator selection provided by a forum is a black box. Again, in-house counsel and their business partners can research alternative forums that offer a broader range of arbitrators with differing backgrounds and experiences.

Further, insisting on a process that allows the parties to choose an arbitrator for a particular matter from a slate of several possible neutrals, with each party ranking and striking a specific number until a consensus candidate is found, ensures optionality and fairness.

To be sure, we can’t always pick our battles. Lawsuits can come from anywhere. But when drafting contracts — including with vendors, customers, employees, and business partners — parties can at least pick their battlefields.