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Arbitration: Not Necessarily A Better Option Than Litigation

Arbitration: Not Necessarily A Better Option Than Litigation

When it comes to resolving disputes between contracting parties, the threat, “I’ll see you in court!” is used a lot less often than it used to be. Over the last several years, arbitration has become increasingly popular, and arbitration provisions now routinely appear in even the most basic agreements. But parties often insert these provisions without a true understanding of the effects arbitration can have. Depending on the circumstances, it can be a less desirable alternative to the court system.

Arbitration is usually viewed as a faster, less expensive alternative to the courts.  While this can be true, there are no guarantees.  Arbitration, depending on the arbitrator and the agency administering the arbitration, can move slowly. 

Contested cases in Maryland’s Circuit Courts (generally over $30,000) usually take 18-24 months to reach a trial.  Suits in Maryland’s District Court (generally under $30,000) usually take four-six months to reach trial. By comparison, it can be difficult to conduct an arbitration more quickly than four months from the date the complaint is issued.  And such cases require an uncontested case or cooperation, something usually missing between adversarial parties.

The cost of an administrative agent and the arbitrator can make simple matters much more expensive than litigation.  The filing fee to a court is usually a one-time, upfront cost in the range of $100-200.  By comparison, arbitration filing fees are $750 or more, with ongoing administrative costs, plus the cost of an arbitrator at a daily or hourly rate, in addition to the cost of your own lawyers and experts.

Arbitration involves a process much like a lawsuit where there is a complaint and a response.  One or more arbitrators preside over the process, similar to a lawsuit.  Generally, though, discovery is limited.  This means that the parties usually exchange documents and prepare position statements prior to the hearing. 

The arbitration itself is usually held in an atmosphere more relaxed than a formal courtroom.  Instead, the parties usually meet in a conference room with the arbitrator at the head of the table and the parties on each side.

The hidden cost of arbitration can be the lack of discovery. In litigation, the parties use a variety of vehicles to obtain information during the Discovery phase. Many lawsuits are filed based on certain allegations, which need to be proven by the party filing the lawsuit or the arbitration complaint. 

Most arbitrations involve only the request for, and exchange of, documents and are conducted without depositions, a staple in most litigation. Without extensive prehearing discovery, parties can find themselves flying blind during the arbitration about what witnesses will say, what documents exist or what information they hold. 

In complex matters, especially those that rely on information exclusively in the hands of the opposing or third parties, arbitration may not be the preferred method of dispute resolution.  Obviously, though, for simple matters, limiting the amount of discovery available to adversarial parties can limit your overall costs.

Many arbitration provisions are silent on how the arbitration is conducted.  Such issues as the venue, the number of arbitrators, and the qualifications of the arbitrators are important considerations.  Conducting an arbitration in a far-flung locale can be an expensive proposition.  More painful may be a provision calling for multiple arbitrators.  Arbitrators are paid for their time to preside over the matter by the day or hour.  The least expensive arbitrators usually charge $150 an hour, while the most expensive might charge $400-$500 an hour or more depending on their area of expertise.

Arbitrators are not always lawyers, and are usually not judges.  While the parties can request arbitrators with certain qualifications, there are no guarantees about the training and experience of the person who will preside over your case.  If you seek arbitration through a reputable organization like the American Arbitration Association, prospective arbitrators are sent to the parties in a panel list with an opportunity to strike those who are objectionable.         

Arbitration is usually binding.  This means the decision of the arbitrator is as final as a decision by a judge.

Arbitration should not be confused with mediation, which is a non-binding process in which a mediator attempts to bring the parties to a resolution of their dispute.  Under both Maryland and Federal law, parties to even binding arbitration have a right of appeal.  Unfortunately though, the appealing parties’ abilities to have an erroneous arbitration ruling overturned are very limited.

Making matters more difficult for a party attempting to reverse or overturn an arbitration ruling is the fact that many arbitrations are not recorded or transcribed.  This leaves a limited record from which a court can determine that an error has occurred.  The result is that only the most egregious errors can be overturned.    Arbitration is a viable alternative to litigation.  But give serious thought to many factors before drafting or signing documents containing arbitration provisions as a dispute resolution method in lieu of litigation.

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