Litigation vs Arbitration – A Primer, Especially For International Companies – Part II

In Part I, we examined the civil litigation system and how it works. We also examined issues of concern regarding the civil litigation system, particularly for international companies. In this Part, we will examine how arbitration works and will compare arbitration to litigation.


Before turning to arbitration, I want to say a brief word about mediation. Both arbitration and mediation are alternative dispute resolution (“ADR”) methods. Both are widely used. However, they are very different. Mediation is a structured settlement negotiation process with a neutral third party known as a mediator. Mediation is not a binding process. The mediator does not decide anything. The mediator tries to help the parties reach a settlement, and nothing is decided unless the parties agree. Mediation can be used whenever there is a dispute. Often, parties will mediate before they file for litigation or arbitration. Parties can, however, use mediation after a lawsuit has filed. Mediation can also be used after arbitration is filed. As stated, mediation is simply a method to help the parties try to reach a voluntary settlement and is often very successful.


Arbitration is a true alternative to the civil litigation process. Arbitration provides a means for a dispute to be decided in a binding proceeding. The key difference between litigation and arbitration is that the parties agree to have their dispute decided by an arbitrator or a panel of arbitrators (typically, a panel consists of three arbitrators instead of a judge and jury. 

Arbitration is a creature of contract. The parties can agree to submit their claims to arbitration in advance by including an arbitration clause in a commercial contract. A very simple arbitration clause might read: “The parties agree to submit any and all disputes arising out of or arising under this agreement to binding arbitration to be administered under the Rules of Arbitration of the International Chamber of Commerce (“ICC”). The arbitration shall be conducted in the English language. The situs of the arbitration shall be Atlanta, Georgia, U.S.A. The award of the arbitrator shall be enforceable by a court of competent jurisdiction.”

If the parties have not agreed in advance to submit their claims to arbitration, they can agree to do so after a dispute arises pursuant to a submission agreement. A submission agreement has similar language to that contained in an arbitration clause.

Generally, it is clear which parties have agreed to arbitrate because they will have signed an agreement. However, there have been instances in which non-signing parties (often affiliates of the signatory parties) are bound under various theories, including agency, alter ego and the like. Such issues do not often arise, and, when they do, may spawn litigation about whether the parties are required to arbitrate.

In the U.S., most arbitrators are lawyers or retired judges. However, business people can sometimes serve as arbitrators. There are a number of organizations that administer arbitrations, including the aforementioned ICC and the American Arbitration Association Parties can also agree to a non-administered arbitration, in which they agree to a method for appointing the arbitrator or panel, and then the arbitrator or panel administers the proceeding.

It is important to understand that, by agreeing to arbitration, a party is giving up the right to litigate in court, and, in particular, the right to a jury trial. Arbitration agreements are generally enforceable under the Federal Arbitration Act if they involve a transaction “in commerce” (meaning it is not entirely intrastate). Most states also have statutes enforcing arbitration agreement.

In the past several years, some parties have tried to avoid arbitration agreements under various theories. For the most part, these efforts have not been successful. The U.S. Supreme Court has generally been very supportive of enforcing agreements to arbitrate.

It should be mentioned that there are some on-going efforts to make arbitration agreements in certain settings — particularly consumer transactions involving form contracts — unenforceable. Given the current political climate, it would not be surprising if these efforts gain traction. However, it would seem unlikely that any legislation would affect the enforceability of arbitration agreements in commercial contracts.

How Commercial Arbitration Works

Commercial arbitration usually begins with the filing of a demand for arbitration. The party filing the demand is called the “claimant.” The administering organizations have different rules, but arbitration rules do not typically provide for a default for failure to answer the demand. The failure to answer is typically viewed as a denial of the claim. The other party (the “respondent”) can file a counterclaim, just as is in litigation.

Administering organizations often have relatively high administrative fees. Lawyers would probably debate whether the “administration” provided has any value, particularly relative to the fees, but the fees must be paid. The failure to pay the fees will typically result in nothing happening until the fees are paid.

In addition to the administrative fees, measures have to be taken to pay the arbitrators. Unlike litigation, where the taxpayers pay the salary of the judge and the minuscule stipends paid to jurors, the parties must pay the arbitrator or arbitrators. The arbitrators typically charge hourly rates comparable to commercial litigators ($300 per hour and up), and it is easy to see how the arbitrators’ fees (particularly for a panel) can become significant. Normally, some deposit (usually split equally by the parties) will be required for the arbitrators’ fees.

The arbitration clause (or submission agreement) may specify how the arbitrators are to be chosen. If the clause or submission agreement does not specify the procedure, the arbitration rules will provide a method. Although the methods vary, common procedures include the administering organization submitting a list from which the parties may strike unacceptable choices (with the arbitrator or panel appointed from the balance), or each party nominating an arbitrator, with the nominated arbitrators choosing the chair. Needless to say, a lot of effort often goes into the selection process.

There is one side issue I should mention. In the past, it has not been uncommon for appointed arbitrators to serve as “party arbitrators,” meaning that they felt free to advance the case of the party appointing them. In 2004, the American Bar Association, in conjunction with the American Arbitration Association, revised its ethical rules to establish a presumption that all arbitrators — whether party appointed or not — would serve in a neutral capacity. However, it is still preferable, in my view, to specify in the arbitration clause or submission agreement that each arbitrator will serve in a strictly neutral capacity. In my view, it utterly undermines the integrity of arbitration when a party arbitrator acts as a secondary advocate for a party.

Once the panel is chosen, there will usually be a preliminary hearing to decide how the arbitration will proceed. The various rules have differing requirements, which are beyond the scope of this article.

It is often said that arbitration is cheaper than litigation because it provides for less discovery. Although this may be true in theory, many practitioners have noted a tendency in U.S. arbitrations to allow very full discovery, at least between the parties. The reason, I would submit is cultural. Most U.S. arbitrations are going to be presided over by U.S. lawyers, most of whom are well steeped in the tradition of “full discovery.” So, just as the old saying, “when in Rome …” goes, when arbitrating in the U.S., anticipate the possibility of full discovery. Full discovery may not be allowed, but do not be surprised if it is.

After discovery is allowed, the arbitrators will specify the pre-hearing procedures. (In litigation, there are “trials”; in arbitration, there are “hearings”). The procedures will typically include the preparation of detailed exhibit books containing copies of all documentary evidence and pre-hearing briefs. The procedures are often as detailed as those required in court, if not more so.

The arbitration hearing is supposed to proceed less formally than a trial. However, in practice, the hearing tends to proceed almost exactly like a civil court trial. The rules of evidence may be applied less strictly, but the basic presentation is pretty much the same. Some arbitrators ask everyone to work while sitting, as if this is somehow a meaningful concession to “informality.” With all respect to this view, I prefer to stand in examining a witness, and do not think it is appropriate for any arbitrator to tell me how to present the case.

Following the arbitration hearing, there will typically be a round of post-hearing briefing. Then the parties sit and wait — often for months — for a decision. The decision, called an “award,” is typically in writing.,

After an award is issued, the winning party may file a court proceeding to “confirm” the award and make the award the judgment of the court. The losing party may file a motion to vacate or overturn the award. Although motions to vacate or overturn the award are often filed, they are seldom successful. The standards for challenging an arbitration award are very difficult.

Assuming an arbitration award is confirmed and made the judgment of the court, it can then be enforced the same as any judgment. In practice, many losing parties will simply pay the award.

Comparing Arbitration to Litigation

Proponents of arbitration have long advocated that arbitration is “faster, cheaper, and better” than arbitration. In my view, it is not nearly so simple.


Whether arbitration is faster than litigation really depends, in large part, on the court system to which it is compared. If a court regularly takes two to three years to dispose of a case, then arbitration may well be faster. However, compared to some courts, such as the “rocket docket” of the Eastern District of Virginia, arbitration will almost certainly not be faster.

There are also some practical factors that tend to slow arbitration down, perhaps more than was formerly the case. First and foremost, at least in the U.S., arbitrations have come to be conducted in a manner very similar to litigation. Much of the litigation discovery process seems to have become incorporated into arbitration proceedings. Anything less than a full exchange of documents would be unusual. Depositions are also becoming quite common in arbitration, and depositions of expert witnesses seem to be allowed as a matter of course.

Second, arbitrators do not tend to dispose of a case without a full hearing. The Federal Rules of Civil Procedure provide for several opportunities for the court to throw out a case that is lacking in any real merit: a motion to dismiss at the outset of the case, a motion for summary judgment, typically filed after discovery, and a motion for directed verdict filed after the presentation of the plaintiff’s case at trial.

Although there is nothing that prohibits an arbitrator or panel from considering a dispositive motion, and although some effort has been made to modify some of the arbitration rules to accommodate such motions, they just do not seem to work in arbitration. Rather, the preference of arbitrators always seems to be to “hear the case.” This means, in effect, that almost every case that is not settled has to go through the full hearing process. A cynic might argue that this approach is to the financial benefit of the arbitrators.

Third, because arbitration has a relaxed evidentiary standard, arbitrators tend to allow the parties to put into evidence anything they want to talk about. This sometimes results in rather lengthy and meandering proceedings.

A final thing that slows arbitration down is that arbitrators often seem to put consensus ahead of efficiency, even in scheduling. Thus, for example, a week may not be set aside for the arbitration hearing unless everyone (the arbitrators, counsel, and the witnesses) has a clear calendar. Trying to coordinate the schedules of many busy people is difficult. This results, sometimes, in arbitration hearings being set far into the future. Further, if the hearing is not concluded in the originally allotted time, the process to schedule a new week starts all over again. A court, in contrast, generally tells the parties when to show up, and they had better show up at the appointed time.

In sum, my experience is that arbitration is seldom significantly faster than most court proceedings, at least in reasonably complicated business cases. In terms of comparing which is “faster,” the result is a about equal.


The argument that arbitration is cheaper than litigation is based primarily on the belief that there will be less discovery in arbitration and that the hearing will be conducted more quickly and efficiently than in litigation. This may have been true at some point in the past. However, as arbitration, at least as it is practiced in the U.S., has come to resemble a court proceeding in form, any such advantage has likely disappeared. This is particularly true for cases that, if brought in court, would likely be dismissed on a pretrial motion.

Further, there are other costs associated with arbitration that parties do not incur in litigation. First, the administering organization often charges substantial administration fees. This can be avoided by using a non-administered arbitration. However, in the U.S., many lawyers who draft arbitration clauses default to the American Arbitration Association or the ICC. Both organizations charge substantial fees.

In addition, as noted earlier, the parties have to pay the arbitrator or arbitrators. Arbitrators, who tend to be lawyers, charge hourly or daily rates that are similar to lawyers. At between $300 to $700 per hour (or more), this can add up quickly. Arbitrators charge not only for the hearing time, but for time spent reading briefs or otherwise preparing, and in their deliberations. In contrast, the taxpayers foot the bill for the judge and jury.


Many business people – particularly international business people – think the prospect of six or twelve citizens picked at random deciding complex business cases is not an optimal decision-making process. This concern is heightened by the fact that some lawyers try to eliminate any person from the jury with any knowledge of the subject area. The potential problem is also heightened by the fact that juries may act to protect local interest, which can be a substantial detriment to international companies.

The jury system may not be the most rational system designed for resolving complex business disputes. The good news is that it seems to work pretty well in the vast majority of cases. However, one still hears of seemingly irrational verdicts or “runaway juries.” The concern is especially acute in certain notorious parts of the country.

Arbitration, in contrast, typically involves lawyers or retired judges with either a clear understanding of the legal issues and often some experience in handling legal disputes in the particular industry. At times, business people with particular industry experience will also serve as arbitrators. Arbitrators may have to go through a vetting process with the arbitration provider before they are allowed to serve on the provider’s roster of potential arbitrators. Further, the parties will typically have the opportunity to investigate the background of each potential arbitrator (or at least the chair) before they are appointed.

For this reason, many companies and their counsel believe that arbitrators generally reach more consistent decisions – and decisions based on facts and not emotions – than juries. It is also argued that arbitrators are far less likely to reach an extreme result – an outlier – than a jury. Finally, many contend that arbitrators are far less likely to be swayed by local political or business interests. As we would say in the South, there is less chance of being “home cooked” in arbitration.

I tend to agree with these views, particularly in cases involving (a) complex business transactions, (b) matters that require a detailed (or counterintuitive) understanding of a particular industry or field of business; or (c) international companies. In such instances, a company would be wise to consider including arbitration clauses in all or most of its contracts.

Limitations on Arbitration

This is not to say that arbitration is a perfect system. There are bad arbitrators, just as there are bad judges and jurors. It is also commonly said that arbitrators often “split the baby” in a dispute, meaning that they reach a compromise result instead of the result demanded by a fair view of the evidence. In my experience, arbitrators do not always compromise, but it sometimes happens.

There are other instances in which arbitration might not be a good choice. First, arbitration is not really well-equipped to deal with situations in which a quick legal remedy might be available in court. For example, a party seeking to collect on a promissory note or other liquidated debt, or seeking to remove a defaulting tenant from a rental property, would probably be better off in court.

Second, parties seeking equitable relief – such as an injunction against the further use of trade secrets or requiring a party to turn over confidential information – might also be better off in court. Courts are used to handling emergency equitable proceedings. Although equitable relief is theoretically available in arbitration, arbitration is not really well-suited for obtaining emergency relief.

The concern over the possible need for equitable relief can be dealt with through an exception to the arbitration clause. It is not uncommon for a contract providing for arbitration to provide that a party may nevertheless seek purely equitable relief – such as an injunction – in court. Such a provision needs to be crafted so that it does not effectively gut the arbitration clause, but that can be done by making clear that the court is allowed only to award equitable relief, with all damages issues to be addressed in arbitration.

Third, parties need to realize that they can generally require arbitration only of persons with whom they have a contractual relationship. Thus, for example, it is generally not possible, at least absent a submission to arbitration after the claim arises, to require arbitration by injured parties of product liability or other tort claims.


Arbitration is not necessarily “faster, cheaper and better” in all instances. In fact, it is rarely faster or cheaper. However, it can be better and can provide more predictable and rational results, particularly for certain types of cases and international companies. In such instances, parties should consider insisting on an arbitration clause in their commercial agreements.

Source by John L. Watkins

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