Originally from: AAA Handbook on Arbitration Practice

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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. 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 article 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.  I use the term “courtroom litigation” to distinguish it from arbitration, which also can be considered 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.3

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.