A dispute resolution clause can be found in practically all of your contracts. It’s typically dismissed as “just another minor boilerplate clause”. That causes your eyes to glaze over, yet it’s considerably more significant than you may believe. Whether or if your contract with your customers (and, of course, with your suppliers) stipulates that any disagreements are arbitrated. And under what circumstances can have a significant impact on the eventual resolution of your dispute. As a result, when drafting your supply agreements, it’s critical to examine both the benefits and drawbacks of arbitration over traditional litigation. The following are some of the most important variables to consider.
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Estimated Time of Completion:
One of the frequently cited advantages of arbitration is that it produces a definitive decision faster and more efficiently than litigation. While this is often the case, it is not always the case. The agency and its arbitration rules, the intricacy of the subject, the conduct of the other side. And the arbitrator all influence how soon an arbitration hearing is finished.
Certain arbitration agencies will set strict deadlines for the completion of arbitration procedures. Which can be as low as six months from the start. Others, on the other hand, will not enforce any deadlines. And will allow problems to drag on for months or even years. This makes arbitration’s timeliness comparable to that of a regular lawsuit. With the exception of the significant time that the appeals process can possibly add to litigation. Arbitrators and judges have somewhat different objectives and motives, as mentioned below. Hence, litigation through the court system may actually prove to be speedier and more efficient than arbitration in some cases.
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Arbitration usually involves limited discovery in which each party obtains information and documents related to the dispute from the other party. Making it more streamlined than litigation and considered to be more cost-effective than litigation in a court system. Where the expense of liberal discovery can be enormous. Of course, arbitration’s lack of comprehensive discovery might be a significant disadvantage,. As parties may find themselves in the dark during the hearing.
While there may be cost savings in terms of discovery. It’s important to remember that, unlike litigation, arbitration frequently requires significant filing and advanced administrative fees upfront. Typically in the thousands or tens of thousands. As well as significant daily or hourly fees for the arbitrator’s (or arbitrators’) time. As a result, for cases that settle quickly, arbitration can be significantly more expensive due to its upfront fees.
Furthermore, due to the varied motivating factors of arbitrators and judges, arbitration can sometimes take longer and be more expensive than litigation, as stated below.
A judge and an arbitrator make different conclusions, which can alter the outcome of a case. This could have an impact on the timeline and overall costs of reaching a resolution. These variables should be considered while deciding between litigation and arbitration.
The parties usually choose an arbitrator together or have a significant say in who is appointed in their case. Some arbitration agreements, in fact, establish specific arbitrator qualifications to assure a certain degree of experience and expertise. A judge who is handling a civil, criminal, and family law docket may not only have more skill in a certain field but also more time. With more experience and time to devote to your case, you should be able to get a better, more efficient conclusion.
However, this isn’t always the case. Because most arbitrators understand that their findings are usually final and binding, they give the parties considerable latitude in modifying their claims and arguments. Furthermore, they frequently dislike disposing of part or all of an issue before the final arbitration hearing for the same reason (similar to a trial). Judges, on the other hand, are more likely to make decisions like these and reject claims as quickly as feasible. Finally, the arbitrator’s hesitancy may cause the parties to wait longer and spend more money to obtain a verdict.
Furthermore, while most arbitrators are motivated by getting the best possible outcome. Many arbitrators who are paid by the hour or by the day have a financial stake in seeing an arbitration process through to a final hearing, which is where the majority of the arbitrator’s fees are earned. This could put their own interests ahead of the parties’ desire for a quick resolution.
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Of course, there’s also the question of who is ultimately in charge of fact-finding. In arbitration, the arbitrator not only hears but decides the parties’ issues and arguments before the final hearing. But also acts as the final decision-maker at the hearing. Except under rare situations, parties in litigation can normally request that their case be heard and resolved by a jury. When a party’s narrative of their case is more “jury friendly,” in the sense that it is intelligible, appeals to emotion, or invokes fundamental fairness, a jury trial might be a significant advantage over the arbitration.
A jury trial may not be the best option if the issues in the case are intricate or technical. As a result, while deciding whether or not to agree to an arbitration clause, parties should try to anticipate the types of claims that might arise in their specific scenario. Both those that they would state and those that might be made against them.
Unlike a regular court case, arbitration is a far less formal process. Arbitration is less formal than litigation not just in terms of the physical venue. But also in terms of the methods used. Judges are bound in litigation by the rules of evidence and, of course, precedent based on previous instances. This helps to guarantee that judges do not substitute their ideas of what is fair and just for what the law allows or demands and that identical issues have reasonably consistent (and predictable) decisions. However, it might also imply that the fact-finder is sometimes denied access to relevant and probative material.
Arbitrators are not bound by the same rules as courts, which means they are not obligated to follow precedent or exclude evidence. Rather, arbitrators have considerable leeway in deciding what evidence can be presented and, as a result, can examine crucial material that would be inadmissible in court. They can also use their judgement to make decisions without regard to precedent if they believe a different outcome is desirable.
However, these benefits might also be downsides. The arbitrator’s completely unfettered discretion. And the informal arbitration procedures could result in more than just additional time and expenses, as noted above.
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Getting a judgement following a jury verdict or a judge’s ruling is not always the end of the road in litigation. The decision of the trial court or jury might be appealed by any or both parties. Of course, if you’ve been wronged by a trial court decision or a jury verdict, the chance to appeal and seek a different result is a huge relief. However, if you’re happy with the trial court verdict, the prospect that the other side would appeal means not just a possibly different conclusion for you, but also a lot more time and money, as the appeal process can take years.
Arbitration, on the other hand, is a completely different animal. Arbitration awards are usually final and binding once they are issued. Although an arbitration award can be contested in court. It will only be vacated in extremely rare and limited circumstances. Such as when the award was obtained by fraud or when the arbitrator overstepped his or her authority. Courts will uphold arbitration verdicts in the vast majority of cases, even if the arbitrator committed a serious legal error. As a result, while arbitration may provide absolute settlement once the arbitrator renders his or her judgement. It lacks the critical procedural check that the appeals process offers on the decision-discretion makers and the outcome of the dispute.
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Arbitration proceedings, unlike litigation, are not open to the public, and because arbitration is performed pursuant to the parties’ agreement. The parties can agree to keep the whole arbitration, as well as any relevant information and documents, confidential. As a result, in arbitration, the parties are allowed to reduce the potential detrimental impact on the affected party that publication of an adverse outcome could otherwise have.
Court processes, on the other hand, are rarely kept secret from the public, and they frequently include time-consuming procedures to ensure that sensitive information and documents pertaining to the parties’ dispute are only accessible to the court and not to the general public.
Given that conflicts in the automotive supply chain frequently contain highly secret and proprietary information and, perhaps more crucially, could have far-reaching consequences if made public, the privacy provided by arbitration is a key aspect to keep in mind.
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The Best Option:
Both arbitration and litigation, as you can see, have their advantages and disadvantages. The decision is based on the nature of the business connection in question, the type of disagreement that is likely to arise (or has already occurred), and, most significantly, your company’s concerns, priorities, and goals. Before just ignoring the dispute resolution clause, speak with your legal counsel to decide the best option for you.