• January 20, 2015

coin_tossIf you are a large corporation, you favor arbitration. If you are a consumer, you oppose arbitration. I won’t try to change the strongly held opinions of either of these two players in the world of commerce. They have their reasons and the analysis behind their preferences is complicated and unsuitable for a short blog post.

But what if you are a small or medium-sized business? Do you want to enter into agreements with arbitration clauses?  Maybe yes, maybe no. Talk to a lawyer who can explore the specific circumstances with care and give you a fully informed opinion. But if you talk to me, I am likely to warn you against entering into arbitration agreements.

The standard criticism against arbitration is that arbitrators tend to “split the baby” (awarding the non-meritorious claimant half the claim and the meritorious claimant half the claim — the very definition, one might say of arbitrariness, by the way). This wide-spread view is seriously unsupported empirically. What cannot be denied, however, is that if an arbitrator’s award (or denial of an award, or split of the award) is dead wrong, there is slim-to-no likelihood of any meaningful appellate review. Most businesses know this. But they think that the risk might be worth running because of a sense that arbitration is faster, cheaper, more confidential, and, in the view of some, more reliably accurate than a judge or jury.

But many lawyers believe the expense savings of arbitration are overblown, if not outright incorrect. Same thing with the supposed time-savings. And there’s plenty of opportunity for confidentiality within our court system. And then there’s the cost of the arbitration process itself. Had a look at the American Arbitration Association (AAA) schedule for filing fees, for starters? Keep in mind, for a commercial dispute involving significant amounts of money (that is, over $100,000 in dispute) these fees are in the multiple thousands of dollars. And these fees are generally non-refundable, as the AAA emphasizes in bold. And do not forget that one has to pay the arbitrators on top of that, of course. Sometimes a whole lot of money for a lengthy arbitration…What kinds of incentives does that create?

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