Over the last seventy years or so, private binding arbitration through organizations such as the American Arbitration Association (AAA) became popular. Many contracts still contain an arbitration clause, and specify that arbitration will be used to resolve disputes under the contract through AAA.
Below is my analysis to provide support for my theory that the advantages of arbitration are outweighed by the disadvantages, and why I do not recommend using arbitration clauses in contract, or relying on arbitration clauses if you can choose litigation.
A. Advantages of Arbitration
Some of the advantages of using private arbitration include:
1. The process may be more user-friendly, allowing a party to represent themselves more easily than in litigation;
2. The process is private, so the public is not allowed to view the arbitration, as compared to a trial which is open to the public;
3. The arbitration process may be faster than litigation, depending a variety of factors, including how crowded the court system is in your jurisdiction;
4. In arbitration, an arbitrator can be picked by the parties who may be familiar with the factual areas of the dispute, whereas a judge usually has no special expertise and is a generalist.
B. Disadvantages of Arbitration
The primary disadvantages of binding arbitration are:
1. There is usually only a limited right to obtain information or documents from the other side in binding arbitration, whereas the court system allows exchange of information and documents prior to trial;
2. Normally, the only ground for setting aside an arbitrator’s decision is undisclosed bias of the arbitrator, although certain types of arbitrator fraud may provide a basis for setting aside an award. It is rare for a court to set aside an arbitration award. Even errors of law or fact by the arbitrator are not the basis for getting an arbitration award set aside;
3. If other parties are included in the dispute, those new parties may not be subject to the binding arbitration, and you could end up having to fight the battle twice, once in arbitration and once in court;
4. The administrative cost of arbitration includes very high filing fees, and hourly fees to be paid for the arbitrator’s time. Litigation involves lower filing fees, and no hourly payment for the time a judge spends resolving your dispute.
C. Shift in Popularity
For many years the American Institute of Architects (AIA) form documents, which are widely used in the United States for construction projects, contained binding arbitration clauses, and specified the use of the AAA as the body to select the arbitrator, and to administer the arbitration.
The current versions of the AIA documents do not. They now provide for the parties to the agreement to choose binding dispute resolution options. The choices listed are arbitration, litigation, and “other.” If the parties do not check one of the boxes listed as a choice in the document, the default binding dispute resolution system is litigation.
I believe this AIA change to a long-standing practice of requiring parties to arbitrate disputes reflects the general dissatisfaction of those in construction with binding arbitration.