What Is the Difference Between Arbitration and Litigation?

If your business is facing a dispute, you have several options to settle the matter. Two of the most popular options are to settle the dispute in a courtroom or to take the matter into arbitration. The arbitration and mediation lawyers at Hendershot Cowart P.C. explain that each process has its pros and cons that should be carefully considered before deciding which route to pursue:

Arbitration Vs. Litigation

Essentially, litigation means taking a dispute to court. Both sides present their case before a judge or jury, who will then render a decision.

Arbitration, on the other hand, is a private process in which both parties agree that an arbitrator (a neutral third party) will render a binding decision. Like litigation, both sides have a lawyer in arbitration, and both make arguments and present evidence to support their case.

Are you facing litigation or arbitration? Don't face it alone. Contact us today for a consultation. Our Houston-based attorneys have been protecting the interests of Texas businesses and individuals since 1987.

What Are The Differences Between Arbitration And Litigation?

There are several differences between arbitration and litigation. The most significant difference is that litigation is handled in the court and must adhere to the strict laws and statutes that govern court proceedings. Arbitration is handled outside of the courts and can be a much speedier and informal process. However, arbitration can only take place if it is provided for in a contract or agreed upon by the parties.

Other ways that arbitration differs from litigation:

Litigation	Arbitration
Litigation is a legal process in which the court decides the outcome for the dispute.	Arbitration resolves disputes by appointing a neutral third party to study the case, receive the evidence, and then make a binding decision.
Litigation is a public procedure with established Rules of Procedure and Rules of Evidence, which govern how a trial is conducted and resolved.	In arbitration, resolving issues between parties are confidential and private, making it a smart choice for businesses that want to keep their private matters away from the public and press.
Litigation typically takes longer due to the formal Rules of Procedure and Rules of Evidence and the backlog of the courts (which has been exacerbated by COVID-19).	Arbitration typically provides a speedier resolution than litigation since the parties and the arbitrator agree on a schedule once the arbitrator is appointed.
Either party may appeal the court’s decision in a civil trial based on an alleged material error in the trial.	Unless otherwise agreed, the arbitrator’s decision is final and binding and cannot be appealed, except in limited circumstances.
In litigation, parties may be compelled to participate in court proceedings.	You cannot compel the other party to participate in arbitration unless you have an arbitration clause in a contract that requires it. Otherwise, both parties must consent to participate in the proceedings.
In litigation, the trial judge is assigned by the court without input from the parties involved.	In the arbitration process, the parties choose the arbitrator, often based on expertise in a related field of law or industry.
Litigation can be more expensive than arbitration due to the lengthy pre-trial discovery process and the appeals process.	Arbitration can be less costly, primarily due to the compressed schedule. However, both the arbitration association and the arbitrator charge discretionary fees, which are borne by both parties in the dispute.

What Are the Advantages of Arbitration?

Arbitration offers several advantages over traditional litigation in court. Here are some of the key benefits:

Speed and Efficiency: Arbitration tends to be much faster than going to court. This is because arbitration follows less strict rules of procedure and evidence, and there are typically fewer delays in scheduling hearings.
Cost-Effectiveness: Arbitration is generally less expensive than litigation. There are fewer court fees and formalities, and the process is usually streamlined, resulting in lower attorney fees.
Flexibility: The parties involved in the arbitration have more control over the process. They can agree on the rules of evidence, select the arbitrator, and tailor the process to their specific needs.
Confidentiality: Arbitration hearings are private, and the award is not typically made public. This can be important for businesses or individuals who want to avoid negative publicity associated with a lawsuit.
Neutrality and Expertise: In most cases, the parties involved can choose the arbitrator, giving them more confidence in the fairness and impartiality of the decision-maker. The parties can also select the arbitrator based on their expertise in a related field of law or industry.
Finality: Arbitration awards are generally binding, with limited opportunities for appeal. This can provide a quicker and more definitive resolution to the dispute.

What Are the Disadvantages of Arbitration?

Arbitration also has some drawbacks, such as the limited ability to appeal decisions and the potential for bias on the part of the arbitrator. It’s not always the right choice for every dispute.

Consider these disadvantages of arbitration:

No Jury Trials: Arbitration eliminates the right to a jury trial. This can be a disadvantage if you believe a jury would be more sympathetic to your case compared to a single arbitrator.
Limited Discovery: Unlike court cases, arbitration often has a restricted discovery process. This means you might have less ability to gather evidence and information from the other party, potentially hindering your ability to build your case.
Limited Appeal Rights: Arbitration awards are usually binding with very few opportunities for appeal. This means you're generally stuck with the arbitrator's decision, even if you believe it's unfair.
Cost Concerns: While often touted as cheaper, arbitration can become expensive. Both the arbitration association and arbitrator charge discretionary fees that are borne by both parties in the dispute. There can also be unexpected costs like filing fees, travel and hotel stays, and hearing room rentals.
It Takes Two: You cannot compel the other party to participate in arbitration unless you have an arbitration clause in a contract that requires it.

A Note On Arbitration Expenses:

Large companies – such as multinational corporations and franchisors – tend to favor arbitration provisions with a forum selection clause.

A forum selection clause allows these large entities to select the forum where the arbitration takes place – usually in the city where they are headquartered, requiring you to travel to them to dispute the matter. Ask an attorney to review your contracts and agreements – especially franchise agreements – before you sign. A business attorney can alert you to these red flags and help you negotiate more favorable terms.

Can You Go To Litigation Or File a Court Appeal After Arbitration?

Generally, no. A binding arbitration clause forces disputing parties to waive their right to litigate.

What Happens If You Lose in Arbitration?

Losing in arbitration means the arbitrator's decision goes against you and the arbitrator may issue an award. This could involve paying money damages, returning property, paying the other party’s arbitration or legal fees, or taking some other action.

Unless otherwise agreed, the arbitrator’s decision is final and binding and cannot be appealed, except in limited, rare circumstances, such as:

Arbitrator Misconduct: There's evidence the arbitrator acted with bias or made procedural errors that significantly impacted the outcome.
Exceeding Authority: The arbitrator ruled on something outside the scope of the arbitration agreement.

If you don’t pay the winning party what they're owed according to the arbitrator’s award, they can take steps to enforce it. This usually involves going to court to have the arbitration award converted into a court judgment. Once it's a judgment, the winner can use the court's judgment enforcement powers to collect what they’re due.

Choosing an Arbitrator

The arbitration clause in your agreement generally dictates how the arbitrator will be chosen.

In some cases, the agreement dictates that the arbitrator is selected according to the rules of a specific arbitration services provider. There are three primary providers of arbitration services in the United States: The American Arbitration Association (AAA), Judicial Arbitration and Mediation Services (JAMS), and American Health Law Association (AHLA), each with its own selection process.

If the arbitration agreement does not specify an institution or process, or if there is no arbitration agreement, the parties must work together to select an arbitrator.

Regardless of the selection process, both parties should carefully consider the proposed arbitrator’s experience and expertise. Your attorney will likely have experience with arbitrators in your area and can share insights and make recommendations that take the specific circumstances of your case into consideration.

Arbitration vs. Mediation: What Is The Difference?

Like arbitration, mediation is an alternative to litigation. However, mediation is merely a negotiation, and there is no guarantee that the parties will come to a resolution. The mediation process is facilitated by a mediator trained in dispute resolution and often takes place while parties await a court date (or arbitration conference) with the goal of reaching a “win-win” solution to the dispute.

In fact, many judges – especially in larger metropolitan areas – will not let a case go to trial without mediation and automatically include a mediation deadline in the docket control order (or scheduling order) that is issued shortly after a lawsuit is filed. If not ordered by the judge, either party may file a motion to compel mediation but it is unlikely that the compelled party will participate in the negotiations in good faith.

If a settlement is reached, it is then recorded in a written agreement that is legally binding. If the parties fail to come to a resolution, then litigation or arbitration is often the next step.

Which Comes First, Mediation Or Arbitration?

Mediation, whether it's an informal negotiation or done with the assistance of a professional mediator, is usually the first step in resolving a dispute.

Mediation takes place outside of the courts, meaning it can be a less expensive option, and provides the parties with more control over the outcome since they actively participate in the decision-making process.

If mediation results in an impasse, the parties may then proceed to arbitration (if an agreement with an arbitration clause exists or both parties agree) or litigation to resolve the dispute.

How the Alternative Dispute Resolution Attorneys at Hendershot Cowart P.C Can Help

Hendershot Cowart P.C. business attorneys have been resolving complex business disputes – in and outside of the courtroom – for more than 35 years. We routinely help our clients resolve lawsuits, disputes, and negotiations through litigation, arbitration, or mediation. We align our legal strategy with your goals, and then work with you to deliver the best possible outcome.

What’s next? You will likely need an attorney to review the details of your case – and the provisions of any relevant contracts or agreements – to determine whether litigation or arbitration (or mediation) is most appropriate, or even available, for your matter. Many contracts require arbitration as an alternative to litigation, and some matters can be resolved through simple legal negotiations.

Let us take care of the fight for you. Contact Us today for a consultation on your business or commercial dispute.