Every relationship, whether personal or business, starts with high expectations and the hope that everything will go smoothly as planned. In business, those expectations typically are outlined in contracts, purchase orders and other commercial documents. 

Yet, things do not always go as anticipated: products or services aren’t delivered on time or don’t function as expected, invoices aren’t paid or are contested, products cause injuries or damage, and more. In other words, stuff happens. So, what to do? Well, depending on the nature of the dispute and the amount at issue, you may decide that it’s not worth the investment of your and your business’ time, resources and efforts to prosecute or defend a claim and will seek to resolve the matter promptly. 

However, in those instances when more is at stake, the parties will seek the assistance of their respective attorneys to handle it. While there may be some initial exchange of communications and dialogue to settle the matter, if those efforts are unsuccessful, the dispute may be headed to litigation or arbitration. Each of these dispute resolution avenues is different and includes certain benefits and detriments of which you need to be aware. 

The Starting Point

The starting point in handling a claim or defending it is to review and understand the contract at issue. You don’t need a formal written document titled “Contract” or “Agreement.” Often, the contract between the parties arises from the terms and conditions of the commercial documents exchanged between them: quotations, purchase orders, acknowledgments and, in some instances, credit applications. 

Those commercial documents typically dictate where a case will be brought and which state’s laws govern the dispute. They also explain whether warranties are disclaimed or limited, damages are limited in any respect, recovery of attorneys’ fees is provided and, most significantly for our discussion here, if the dispute will be adjudicated in a court of law or through an arbitration proceeding. 

So, while it is necessary to review the applicable contract terms after a dispute arises, it is more important to read and understand the terms and conditions outlined in the various contract and commercial documents exchanged between your business and its customers or suppliers before accepting a contract. Otherwise, you may accept the other party’s terms and conditions by default because you did not reject them promptly. That is an issue that we will discuss in a future column. 

Litigation is in a court of law before a judge and possibly a jury. It is the traditional means of resolving a dispute. Litigation is what happens absent an agreement by the parties to engage in arbitration, which is “private litigation” and not conducted in a public forum. Instead, the parties retain the services of an arbitrator through an alternative dispute resolution company. Arbitration is consensual and undertaken only by voluntary act of the parties. Absent such an agreement, disputes will be subject to litigation.

Whether in litigation or arbitration, the parties must deal with common considerations and issues, such as cost, discovery, timing, trial or hearing procedures and possibly an appeal. However, significant differences exist in how these issues are treated. 

1. Cost

•  Litigation. Cost is one very significant difference between litigation and arbitration. Litigation costs much less than arbitration. Since litigation is in a public setting, the court administrator (court clerk) and the judge are public employees paid by the taxpayers. As such, other than a comparatively modest filing fee, which could cost hundreds of dollars (but not thousands), there are no court-generated expenses. 

Of course, during litigation, you still may incur costs for deposition expenses (such as for court reporters), discovery expenses and your own attorney’s fees. However, to some degree, those costs are incurred in litigation and arbitration.

•  Arbitration. Unlike in litigation, where there is a minimal filing fee and court-related administration costs are funded by taxpayers, in arbitration, the parties pay the arbitrator(s) an hourly fee, which can be quite expensive. In some cases, depending on the arbitrator, such as a retired judge or attorney from a larger firm, the arbitrator’s hourly rate can be upwards of $1,500 or more. 

Even though that fee is split between the parties, the resulting cost can still become significant. In addition, unlike in litigation, where the court filing fee is typically reasonable, administrative fees in arbitration can be in the thousands of dollars. Depending on the amount at issue and the arbitration organization used, filing fees can be $7,500 or more. 

An annual administrative fee may be incurred — on top of the arbitrator’s fees and those of your attorney. So, again depending on the amount at issue, the cost of arbitration simply may not be worth it. This could be why some parties, especially those with “deeper pockets,” insist on including an arbitration provision in a contract. Doing so may make its customer or supplier think twice before pursuing such an expensive remedy. 

As such, when you find an arbitration provision in a contract or other commercial document, you must decide whether to delete or modify it, especially if the arbitration provision requires the use of three arbitrators (each of whom will charge their respective hourly rates).

2. Discovery

•  Litigation. Discovery is the process through which each party finds out about the other side’s case. This is done through written questions that will be answered in writing under oath (called interrogatories), by requests to produce documents and depositions, where parties and related witnesses are questioned under oath by the other side’s attorney before a court reporter memorializing that sworn testimony. 

This is a critical phase of a case. It can take a significant period and can be expensive — especially if there are thousands of pages of documents (including emails) involved. All those documents must be produced and reviewed. Discovery in litigation is conducted in accordance with applicable court rules of procedure. It is the building block of properly preparing a case for a trial, whether you are prosecuting a claim or defending it.

•  Arbitration. Unlike in litigation, where discovery is a matter of right (in accordance with applicable court rules), in arbitration, discovery can be very limited and is typically permitted at the arbitrator’s discretion. Often, the rules of the particular dispute resolution organization specified in a contract state what discovery types are permitted. 

While this could result in reducing the arbitration time and cost, the inability or limited ability to obtain documents and to take depositions could interfere with proper case preparation and presentation.

3. Timing

•  Litigation. Cases can take years or be over in months. It all depends on a number of factors, including the complexity of the case, the court’s docket backlog and whether each side is willing to invest in proceeding. Hope for the best, but don’t expect a trial and an outcome in any significant case for at least two or more years.

•  Arbitration. The one benefit most people associate with arbitration is the belief that it will take much less time to complete than litigation. Sometimes that is true; however, it may be because less time is given for preparation, such as limited discovery. However, with large, complex cases and where some discovery is permitted, arbitration proceedings can take as long as litigation.

4. Procedures and Trial

•  Litigation. How a case is administered is based on applicable court rules, related statutes and case law. The parties’ attorneys know what to do and expect and will proceed accordingly. Assuming the case is not settled or resolved, there will be a trial, sometimes before a judge and a jury and other times only before a judge. 

At the trial, attorneys present evidence (testimony and exhibits) and judge witnesses’ credibility, and the judge or jury renders a verdict or decision. However, it may not yet be over.

•  Arbitration. Each alternative dispute company (and there are many), has its own specified rules and procedures as to how cases are handled. As in litigation, there will be a hearing before an arbitrator who will decide the case and who, like a judge, has significant discretion. Unlike judges in public trials; however, arbitrators don’t always follow strict evidentiary rules. 

Further, the proceeding can be more relaxed. Also, unlike litigation, where there is significant case law as to how rules should be applied and procedures complied with, there is no corresponding significant body of court decisions relating to the administration of arbitrations. One of the reasons for this is arbitration decisions are not appealable.

5. Appeals

•  Litigation. In all cases, someone wins, someone loses and sometimes, each side shares a bit of both. However, no one is perfect. Mistakes can be made by the best lawyers and judges that could affect a case’s outcome. In such instances, one or both parties may wish to appeal the judge’s decision. That is done by bringing the case to an appellate court that will examine the record of evidence and testimony from the trial court. 

However, no new evidence will be introduced. Appellate courts are not fact-finding tribunals. Their decisions are based solely upon the appellate court’s examination of what happened in the trial court and whether an error occurred. An appellate court can overrule or reverse a trial judge’s decision and, in some instances, will return the case for a new trial or provide other relief.

•  Arbitration. Perhaps the biggest substantive difference between arbitration and litigation is that the decision of an arbitrator is not appealable. Only under very limited circumstances can an arbitrator’s decision be challenged. So, if an arbitrator makes an erroneous ruling, one or even both parties may suffer without any recourse.

In litigation, the parties know what to expect based upon definitive court rules and established procedures, can use discovery to effectively prepare the case, court costs are minimal and there is an avenue to contest the result of the trial court. 

The same is not true with respect to arbitration. Depending on the nature of the case, an arbitration proceeding may be the preferable way of resolving a dispute. If the matter at issue is very focused, there are not many witnesses or documents involved, and the amount at issue is not hundreds of thousands of dollars, arbitration may be preferable. 

However, in my practice, although some of my largest victories have come in arbitration proceedings, I still would prefer to be in court every time.

Avoiding Disputes

Whether through litigation or arbitration, dispute resolution can be a time-consuming, expensive, exasperating and draining experience that should be avoided, if possible. To achieve that goal: 

Finally, spending some time and effort and even financial resources with your attorney to ensure that your terms, conditions and contracts are properly prepared and reviewed could save you the expenditure of much more time, money and effort engaging in litigation or arbitration. It’s the difference between fire prevention and putting out a raging blaze. Don’t get burned!