Originally from:

AAA Handbook on Arbitration Practice - Second Edition

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CHAPTER 1

WHERE SHOULD YOU LITIGATE YOUR
BUSINESS DISPUTE?
IN AN ARBITRATION OR THROUGH THE COURTS?

John H. Henn

I. Introduction

Lawyers who advise business entities commonly confront the
question of whether to resolve disputes by arbitration. This question
usually arises at the time the parties are negotiating a transaction
agreement, including the matter of how if at all to provide for the
resolution of future disputes. Often the decision is made, not as a result
of any systematic consideration of the merits of arbitration versus a
judicial forum, but rather as a result of anecdotal information about good
or bad experiences with each process. This chapter aims to provide the
basis for a more systematic consideration of the arbitral versus judicial
alternatives.

At least since the early 1990s, arbitration has become more popular
with American business, which has been moving away from resolving
commercial and business disputes through courtroom litigation and
toward arbitration.1 I use the term “courtroom litigation” to distinguish it
from arbitration, which is also a form of litigation, because both
processes are adversarial and are conducted before an independent,
neutral decision maker. Courtroom litigation is always administered by
independent administrative staff, while arbitration is administered by a
neutral administrative body only if the parties agree to it.2 While an
arbitral award can be voluntarily complied with by the losing party, often
it must be entered in a court of law so that judicial mechanisms made
possible by governmental power will allow for its enforcement against a
noncomplying party. The era of judicial hostility to enforcing arbitration
agreements, and enforcing arbitration awards, has been dead for several
decades.

Arbitration of commercial disputes always results from an agreement
to arbitrate entered into either before or after a dispute arises. Whether to
agree to arbitration turns on an understanding of the pros and cons of
arbitration and courtroom litigation, in the context of considerations that
matter to commercial entities. These will be discussed next.

II. Key Factors in Deciding Whether to Arbitrate

Most companies involved in a business-to-business (B2B) dispute
consider minimizing out-of-pocket costs and the cost of tying up
management to be of high importance. When compared with courtroom
litigation, arbitration is normally the more economical alternative. The
principal factors informing this view are lower discovery costs in
arbitration, fewer pre-trial motions (e.g., dispositive motions in
arbitration can only be allowed in certain cases, and only in the
arbitrator’s discretion; they are not that common), and a more limited
right to appeal. In addition, companies are increasingly concerned with
keeping their dispute private, as many filing in court are now available
on the Internet. Also, senior management time can more easily be
accommodated, including in those cases where limited deposition
discovery might be allowed. Finally, companies usually favor the more
expedited nature of arbitration, as compared to judicial proceedings.