What are the Benefits and Drawbacks of Arbitration?

Arbitration Benefits and Drawbacks
Arbitration Benefits and Drawbacks. Tim Macpherson/Getty Images

Arbitration is a form of alternative dispute resolution in which the two parties agree not to take their dispute to court, but instead to resolve the dispute by hiring an arbitrator to hear both sides. Arbitration is used in labor disputes, business and consumer disputes, and family law matters. 

In arbitration, the two sides are not usually represented by an attorney. An arbitrator is selected, and both parties have an opportunity to present.

The rules of evidence do not apply. 

The decision of the arbitrator is final and no appeal to the arbitrator's decision is possible. Many consumer, franchise, employment, and other business contracts include an arbitration clause; some of these clauses require mandatory arbitration.

Benefits of Arbitration

Advocates of arbitration claim that it has these benefits over litigation (going to court):

  • The speed and informality of the arbitration process is claimed to be a major reason why many businesses select arbitration over litigation. In many cases, arbitration can be a shorter process, and if no attorneys are needed it can be less costly. 
  • The two parties to the arbitration have control over the selection of the arbitrator, as compared to a court case in which the judge and jury selection is out of the hands of the two parties. 
  • The says, "Sometimes if the parties want, arbitrators can decide things that judges are not allowed to decide." 
  • Arbitration is a less formal process, which makes the process move faster. 
  • Arbitration hearings are private, and the results are not part of the public record. 

Drawbacks of Arbitration

On the other hand, those who argue against using arbitration cite these issues:

  • The lack of a formal evidence process, which means you are relying on the skill and experience of the arbitrator to sort out the evidence, rather than a judge or jury. No interrogatories or depositions are taken, and no discovery process is included in arbitration.
  • The lack of a formal appeals process, and the (usually) binding nature of the process. If you are a party to a binding arbitration and you want to protest the decision of the arbitrator, you may not be able to do so unless there is some reason to believe the arbitrator acted with malice or was biased.
  • Mandatory arbitration clauses in consumer contracts and employment contracts often work in favor of the company rather than the employee or consumer. 
  • Arbitrators may not be unbiased. If an arbitrator has a history of siding against one side in a dispute, that arbitrator may not be chosen, against an arbitrator who has a history of being partial to one side or another. 
  • The fact that arbitration hearings are not public may put one side at a disadvantage. 

Is Arbitration Better than Litigation? 

The common wisdom you hear often is that arbitration costs less. But that's not necessarily true. Many companies get attorneys to help them with arbitration, and the cost of an arbitrator can be high. One study, done by showed that, in 19 cases, arbitration was actually more expensive than litigation, and the median time for arbitration was two months longer than in comparable litigation cases.

In many of these cases, the case was settled out of court, shortening the time and saving a good deal of money. Arbitrators, on the other hand, are reluctant to "settle" before hearing both sides. 

If you are considering putting an arbitration clause in a contract, or if you are faced with having to sign a contract with an arbitration clause, consider these benefits and drawbacks in making your decision about whether to arbitrate.