Key Takeaways

  • Arbitration is a dispute resolution process where a neutral third party, the arbitrator, often makes a binding decision without going to court.
  • It's less formal than court trials and usually faster and less expensive.
  • Arbitration's advantages can include finality, flexibility, lower costs than litigation, confidentiality, and a higher degree of control.
  • Potential drawbacks include potential bias from arbitrators, no appellate options, limited discovery, increased costs, and a lack of transparency.
  • Arbitration, litigation, and mediation are three forms of alternative dispute resolution, but they have significant differences.
  • Post a job on UpCounsel to find a lawyer in your state to get answers to your questions about arbitration.

What are the advantages and disadvantages of arbitration? Arbitration can be simpler, faster, more peaceful, and less expensive than litigation. 

However, the process is not subject to the same rules of evidence and discovery as a court case. This can raise questions of fairness and transparency. 

This article explores the pros and cons of arbitration in detail. It will also include information about the arbitration process and other dispute resolution methods. 

What Is Arbitration?

Arbitration typically involves settling a legal dispute without going to trial in a public courthouse. Since trials can be expensive and time-consuming, arbitration can benefit many people. 

During arbitration, much as in a courtroom, a third-party listens to both sides of a legal disagreement. The arbitrator issues a resolution based on the documents provided and the oral statements of each person involved.  

Witnesses are sometimes called in to provide an oral statement.

Arbitration is often chosen in an effort to reduce legal costs. However, careful consideration is required to determine whether it is the most beneficial option for a specific legal case.  Legal costs can also be more expensive, depending on how much time the Arbitrator has to spend on the case–because one or both of the parties has to pay the Arbitrator and his staff (unlike a typical judge, who is funded by taxpayers). 

Additionally, Arbitration can be used to decide discrete legal issues for a matter that is currently pending in a courtroom–but that requires the consent of all parties involved.

When is Arbitration Used?

Arbitration is common in cases where the parties want to resolve a dispute faster or privately. It is also common when a resolution is needed in a specific industry or commercial activity. 

Arbitration is commonly used in the following scenarios: 

Once an arbitrator decides a matter in arbitration, the legal outcome is final and cannot be appealed. Many contracts have a specific arbitration clause, meaning arbitration is required. Without the written consent of a party, that party generally cannot be compelled to participate in arbitration rather than the court system.  

Pros of Arbitration

There are many advantages to arbitration: 

  • Speed: A legal resolution through arbitration can be much quicker than waiting for a trial date. Arbitration is less formal and more flexible in terms of scheduling (assuming your Arbitrator is available, which is not always the case).The discovery process can sometimes be resolved through a phone call, cutting down on much of the traditional trial process that is often found in courts.

According to the AAA, the average length of the arbitration process is 11.6 months vs. 24.2 months for U.S. district court cases. 

The process can be even faster with Fast-Track Arbitration, which we’ll discuss below.

  • Cost: In theory, arbitration can be cheaper if the process doesn’t last as long. Both parties often split the cost of the arbitrator, though, meaning that part of litigation is more expensive than a judge paid for by taxpayers.
  • Confidentiality: The arbitration legal process is more private than a trial, because there generally any member of the public has no right to view records or proceedings in arbitration.
  • Fairness: Both parties agree to the arbitrator, which can afford parties a fair legal proceeding. Parties can agree to choose an arbitrator with experience in their specific area of legal dispute. Still, many allege that arbitrators are biased towards parties that repeatedly appear in arbitration.  After all, the income earned by arbitrators, unlike judges, is dependent on who hires them.  So if an arbitrator rules against a party that repeatedly appears, that party is unlikely to select that arbitrator in future proceedings.
  • Finality: There is a level of finality to the arbitration process. Because it cannot be appealed, both parties can move on following the outcome.
  • Simplified Procedures: Legal outcomes are more adaptable to the two parties present in the dispute. Still, they often follow the same or similar rules found in courts, which can be quite complicated.

Fast-Track Arbitration

Once an arbitrator is chosen, they will select the arbitration date, time, and location. A general timeline consists of nine to twelve months from the arbitration filing to the final hearing (trial) date.  

American Arbitration Association (AAA) rules state that any claim under $75,000 can be fast-tracked to be completed even faster. Under a fast-track arbitration, the arbitrator may set a hearing date within 30 days of the legal claim, unless there is an objection.

Cons of Arbitration

While there are significant benefits of arbitration, there are also potential drawbacks. 

Some of the disadvantages of arbitration include: 

  • Cost: Arbitration can be a more cost-efficient option to reach a legal settlement, but it might not make sense depending on the speed and cost of the Arbitrator.
  • Limited Discovery: If the dispute in arbitration is complicated, and a party seeks extensive discovery to prove or disprove the case, they may face obstacles to obtaining that information.
  • Lack of Transparency: The level of confidentiality involved in arbitration cases could potentially disadvantage one party. There is also a lack of transparency, which is not the case in public courtrooms.
  • Finality: The arbitration decision is final. There is no formal appeals process available. Even if one party feels the outcome was unfair, unjust, or biased, they cannot appeal it.
  • Rules of Evidence: A judge in a traditional court setting has specific regulations regarding the acceptance of evidence. Arbitrators, however, can sometimes utilize any information that is brought to them.
  • Lack of Consistency: Arbitration doesn’t operate with the same standards of courts, making consistency difficult. An arbitrator can be overly biased, which is sometimes the case in mandatory arbitration contracts.

Other Dispute Resolution Methods

Arbitration is often conflated with other dispute resolution methods, including litigation and mediation.

Here is how arbitration differs from these methods.

Arbitration vs. Litigation

Litigation is a public process in a courtroom presided over by a judge and sometimes a jury. It is generally more formal, lengthier, and costlier than arbitration.  

Arbitration tends to be quicker, less formal, and less expensive than litigation. Moreover, the parties have more control over choosing the arbitrator and setting the procedural rules. 

This can also be a preferable method. Confidentiality is sometimes important, e.g., in business disputes where trade secrets or confidential information are at issue, or it might simply be desirable to avoid delays in determining the dispute. 

Other litigation advantages include having a more structured legal process and broader appeal rights. 

Judgments can sometimes be more easily enforced in different jurisdictions.  

Litigation tends to be better for cases involving complicated legal issues requiring extensive discovery and matters of enforceability and transparency.

Arbitration vs. Mediation

Mediation is a more cooperative process than arbitration. During mediation, the parties communicate and negotiate with the assistance of a neutral mediator to reach a mutually acceptable solution.  

The parties can then proceed to use other alternative dispute resolutions or litigation, if no agreement is reached.  

Mediation is sometimes used when the parties value their relationship and want to continue working together to find a resolution in a less adversarial and more cooperative way. 

Although the mediator facilitates communications between the parties, the mediator does not decide the outcome of the dispute. Instead, the mediator helps the parties identify areas of agreement and works toward a solution both parties can accept.  

Mediation is generally non-binding, meaning if the parties cannot reach an agreement, or settlement, they are not bound by anything that occurred during mediation.  

However, mediation can be required as part of a court order. In this case, if the parties fail to comply with the mediation agreement, this could be a breach of contract. 

Speak with a Lawyer About Arbitration

There are both advantages and disadvantages to arbitration. If you are dealing with a legal arbitration case, post your legal job on UpCounsel's marketplace to find an arbitration lawyer in your state.  

Hiring a lawyer for arbitration is not technically required. However, arbitration can be particularly adversarial. Having a lawyer on your side can make a profound difference in the outcome of your case.  

UpCounsel accepts only the top 5% of lawyers on its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.