Disadvantages of Business Arbitration

Disadvantages of Business Arbitration

Disadvantages of Business Arbitration

This post covers the disadvantages of business arbitration. In a previous post we covered Advantages of Business Arbitration, however, for some, the choice to have their disputes litigated may be more appropriate.  In this post we will explore some of the disadvantages of business arbitration. After you have reviewed the pros and cons of arbitration over litigation you can discuss with your legal adviser which might be more appropriate for your business in different circumstances as often there is no single best answer – some factors to consider are:

Some Reasons Why Business Arbitration may be Disadvantageous.

  • Generally, there is no right of appeal in arbitration, the Federal Arbitration Act provides very limited grounds for appealing an arbitration award (egregious misconduct or fraud on the part of the arbitrator). So even if the arbitrator makes a (non-fraudulent) mistake there may be limitations on your avenues for further recourse.
  • There is no inherent right of discovery. The parties must agree to allow discovery or the arbitrator can make a ruling permitting discovery. This can be problematic if you have a case that needs to be developed through the discovery of facts, testimony and documents in the possession of the adverse party.
  • Using a panel of expert arbitrators can be quite expensive. Courtroom Judges are paid by with public funds, whereas arbitrators are paid by the hour, by you. If you agree to use an arbitration panel of 3 arbitrators, you are paying by the hour times 3.
  • The upfront filing fees in Arbitration are higher than courts. The case filing fees for a commercial arbitration with the American Arbitration Association start at $1350 and increase depending on the amount in controversy and can be more than $14,000 in some cases. These fling fees do not include the arbitrator’s fees.
  • Arbitrators are not necessarily bound by the rules of law and have been known to make awards based on “justice” and “equity” giving rise to a greater possibility of compromise decisions or “splitting the baby.” This is where research on the arbitrator and understanding their reputation is essential.
  • Opposing parties cannot be compelled to arbitrate – unless they have previously agreed in an enforceable arbitration agreement.
  • Some believe that the rigid and formal court processes help to ensure a greater impartiality and fairness of result. For example, Judges are paid a salary no matter how many cases they hear, whereas arbitrators are paid for each hearing they conduct. As a result, this may give rise to an economic bias in favor of the party who is more likely to use the services of the Arbitrator again in the future.

Bottom Line for Disadvantages of Business Litigation

These are just some of the considerations which may be disadvantages of business arbitration. Businesses considering using arbitration clauses in employment contracts, commercial contracts or other transactions should consult with their legal counsel to determine whether the advantages outweigh the disadvantages of business arbitration.

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