Our team recently launched a new webinar series - Commercial Collections Corner. This engaging series is designed to give you the inside scoop on commercial collections—at least all the critical information you need to know.
In our debut episode, shareholder, Columbus office managing attorney, and Commercial Collections Group chair Jim Kozelek, answers top questions about arbitration. There was also a special guest appearance from Yoda – watch the webinar to see for yourself!
Understanding arbitration
When a business transaction falls apart, lenders don’t always know what steps to take next. There are many different pathways, including private forum arbitration, to consider when you need to collect on an overdue commercial account.
Over the last couple of decades, arbitration has emerged as a popular alternative to litigation for commercial disagreements and legal issues. There are several advantages to choosing arbitration, but it’s also important to understand the nature of the process and decision-making. It may or may not be right for you depending on your case details.
1. What is arbitration?
Arbitration is a consensual, private dispute resolution method based on a contract. The ability to refer a dispute to arbitration relies on the parties’ agreement (the "arbitration agreement"). Commercial contracts commonly include a provision for how disputes will be resolved if they occur. If the parties decide to move forward with arbitration, the arbitration agreement or provision will be part of the document recording the terms of the transaction.
2. Do I need to arbitrate?
The simplest answer to this question is, "It depends." Many believe an arbitration clause in a contract deters class action lawsuits. While it is understandable to make this assumption, mass arbitration remains possible.
There are other reasons to include an arbitration provision within a contract outside of the concern of class action suits. A major benefit is the privacy of the matter. Arbitration protects information related to the case, keeping case filings, contract details, and other pertinent information confidential.
It is essential to read through arbitration provisions because they can vary greatly. Some are one paragraph, and others are multiple pages. They can be as general or as specific as you want them to be. Even terms such as “may”, “can”, “shall” or “must” can shift the meaning of whether you need to arbitrate.
3. Can someone voluntarily waive arbitration?
The short answer is, “yes” as there are no rules preventing a party from abandoning claims it could raise in arbitration and proceeding to court instead. However, there are some implications to think through. The opposing party can ask for sanctions, particularly to cover costs related to attorney fees, legal filings, etc. In some states, such as New York, you need to get permission from the opposing party if an appearance is made. It’s not as simple as ignoring the arbitration provision and heading to court for litigation.
4. Is arbitration better than litigation?
As stated above, it depends. Many parties favor arbitration due to its cost-effectiveness, efficiency, confidentiality, and flexibility.
- Cost-effective: Arbitration is generally cheaper than litigation because it has fewer procedural requirements and more streamlined processes. It can also resolve disputes faster than court cases, which can take years.
- Confidentiality: As mentioned earlier, another benefit is privacy, which is crucial for parties who wish to keep sensitive information or practices confidential and out of the public eye.
- Efficient: As the Rules of Civil Procedure and the Rules of Evidence are used and/or enforced at the discretion of the Arbitrator, Arbitration offers faster resolutions compared to court proceedings, which can be a significant advantage for time-sensitive matters.
- Flexibility: Parties have more control over the arbitration process, enabling them to tailor and customize procedures to their specific needs.
5. What else influences the decision to litigate or arbitrate?
Arbitration has its positives, but there are cases where litigation may be the preferred choice. One significant advantage of litigation is the opportunity to set legal precedents—more so than arbitration. Court decisions create binding legal precedents that can influence future cases. Arbitration decisions are private and carry no precedential legal effect.
Other factors influencing your decision may include:
- Client preferences: Some clients value confidentiality and expediency of arbitration while others may prioritize the opportunity to set legal precedents in a more traditional forum such as court. Every case is different.
- Industry considerations: The nature of the dispute and industry can influence the choice between litigation and arbitration. Certain industries may have more established norms or industry-specific contract terms making arbitration more attractive. .
- Long-term versus short-term goals: Arbitration may provide quicker resolutions, but ultimately it depends on business objectives and impact.
Like any case, it’s important to weigh the risks and rewards of both arbitration and litigation, including the likelihood of success and the potential costs involved from start to finish.
Watch the full webinar
To get all of your arbitration questions answered, watch the entire episode. If you have additional questions or would like to learn more about our commercial collections solutions, feel free to contact Jim at any time!
This blog is not a solicitation for business, and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
