Arbitration Pros and Cons

Learn about the advantages and disadvantages of arbitration.

In the past few decades, arbitration has become a mainstay in resolving legal disputes. But is arbitration right for you? To find out, learn about the advantages and disadvantages of this dispute resolution technique. That way, you can make an informed decision when choosing arbitration or deciding to sign a contract that contains a mandatory arbitration clause.  (To learn more about arbitration, read Nolo's article  Arbitration Basics.)

Pros of Arbitration

Promoted as a way to resolve disputes efficiently, proponents of arbitration commonly point to a number of advantages it offers over litigation, court hearings, and trials.

Avoids hostility. Because the parties in an arbitration are usually encouraged to participate fully and sometimes even to help structure the resolution, they are often more likely to work together peaceably rather than escalate their angst and hostility toward one another, as is often the case in litigation.

Usually cheaper than litigation. Arbitration is becoming more costly as more entrenched and more experienced lawyers take up the cause. It is not unusual, for example, for a well-known arbitrator to charge $3,000 to $4,000 per day for his or her services. And most parties in arbitrations will also hire lawyers to help them through the process, adding to their costs. Still, resolving a case through arbitration is usually far less costly than proceeding through litigation because the process is quicker and generally less complicated than a court proceeding.

Faster than litigation. According to a recent study by the Federal Mediation and Conciliation Services, the average time from filing to decision was about 475 days in an arbitrated case, while a similar case took from 18 months to three years to wend its way through the courts.

Flexible. Unlike trials, which must be worked into overcrowded court calendars, arbitration hearings can usually be scheduled around the needs and availabilities of those involved, including weekends and evenings.

Simplified rules of evidence and procedure. The often convoluted rules of evidence and procedure do not apply in arbitration proceedings making them less stilted and more easily adapted to the needs of those involved. Importantly, arbitration dispenses with the procedure called discovery that involves taking and answering interrogatories, depositions, and requests to produce documents often derided as a delaying and game-playing tactic of litigation. In arbitrations, most matters, such as who will be called as a witness and what documents must be produced, are handled with a simple phone call.

Private. Arbitration proceedings are generally held in private. And parties sometimes agree to keep the proceedings and terms of the final resolution confidential. Both of these safeguards can be a boon if the subject matter of the dispute might cause some embarrassment or reveal private information, such as a company's client list.

Cons of Arbitration

Being aware of the possible drawbacks of arbitration will help you make an informed decision about whether to enter or remain in a consumer transaction that mandates it or whether to choose it as a resolution technique if a dispute arises.

Limited recourse. A final decision is hard to shake. If the arbitrator's award is unfair or illogical, a consumer may well be stuck with it and barred forever from airing the underlying claim in court.

Uneven playing field. Some are concerned that the "take-it-or-leave-it" nature of many arbitration clauses work in favor of a large employer or manufacturer when challenged by an employee or consumer who has shallower pockets and less power.

Most retailers car dealers are repeat offenders here do not mention the arbitration clause before requiring the customer to sign the purchase agreement. Or they will wait until you are ready to drive the car off the lot, then casually mention that they won't sell unless you sign.

Questionable objectivity.  Another concern is that the process of choosing an arbitrator is not an objective one, particularly when the decision-maker is picked by an agency from a pool list, where those who become favorites may get assigned cases more often.

Adding possible complication: Many of the national arbitration groups actively market their services to companies that issue credit cards or sell goods to consumers, casting additional questions on the alleged neutral's objectivity. And an arbitrator chosen by a party within an industry may be less objective, more likely to be biased in favor of the appointing group.

Lack of transparency. As mentioned, the fact that arbitration hearings are generally held in private rather than in an open courtroom, and decisions are usually not publicly accessible, is considered a benefit by some people in some situations. Others, however, lament that this lack of transparency makes the process more likely to be tainted or biased, which is especially troublesome because arbitration decisions are so infrequently reviewed by the courts.

Rising costs. While most still claim that arbitration is less costly than litigation, its costs are increasing. According to a recent survey by Public Citizen, a consumer watchdog group, the cost of initiating an arbitration is significantly higher than the cost of filing a lawsuit: $6,650 to $11,625 to initiate a claim to arbitrate a consumer claim worth $80,000 versus $221 to file that action in a particular county court. Add to that the arbitrator's fees multiplied by three if a panel is involved in addition to administrative costs, and the process appears to be less of a bargain.

Smart Steps for Consumers

Given the possible perils and unevenness for those who unwittingly enter arbitration contracts, the wise consumer can take a number of steps to become better informed and, possibly, ward off a bad experience.

Know the terms of your agreements. Read or reread all agreements you've entered with a retailer, credit card company, or health care provider that may contain arbitration provisions. If the writing obligates you to binding arbitration, and that is not your wish, shop around for another provider.

Heed all agreement changes. If a company switches the terms of its contract to include mandatory arbitration, it must notify you in writing first. Some of these notices may come buried in the envelope itemizing your bill. Resist the temptation to recycle them on sight and read the fine print.

Speak your mind. If you find an arbitration clause objectionable, be sure to make your feelings known to company management. It is sometimes possible to negotiate the provisions away if the company wants your business badly enough. And even large behemoths have been known to change their mandatory arbitration policies if they cause enough distress among their customers.

For more information on alternative ways to resolving disputes outside the courtroom, see  Mediate, Don't Litigate: Strategies for Successful Mediation , by Peter Lovenheim and Lisa Guerin (Nolo).