As many in-house counsel are painfully aware, litigating a dispute in court is generally time-consuming and expensive. Further, given a losing party’s right to appeal an adverse verdict, and with all due respect to Yogi Berra, litigation ain’t even over when it’s over. As a result, some companies choose to include arbitration clauses in their agreements, believing that this will greatly reduce the amount of time and expense their company will have to incur if a significant dispute arises that cannot be resolved.
While it usually is quicker and less expensive to arbitrate a dispute rather than to litigate in court, that is not always the case. For example, while it only would cost $375 to file a $5 million claim for breach of contract in the Federal District Court, the fees for commencing commercial arbitration before the American Arbitration Association (“AAA”) are $14,600 – even if the case is extremely simple. (Fees under the AAA Commercial Rules are tied exclusively to the amount of damages being claimed.)
Even if you are convinced that potential disputes can be more expeditiously and less expensively resolved through arbitration, would your company necessarily benefit from having in place a dispute resolution process that is quick and inexpensive? The answer is not always yes. If you can afford to spend years of time and thousands of dollars litigating a dispute but your adversary cannot, having a dispute resolution mechanism that is neither inexpensive nor expeditious plainly works in your favor. In fact, the specter of embarking on costly and arduous litigation has led more than one party to agree to settle for pennies on the dollar even when it had a meritorious claim (and without ever initiating litigation), because it simply could not take the time or pay the costs associated with standard litigation.
Don’t knee-jerk yourself into arbitration simply because it sounds smart to agree to a dispute resolution mechanism that is quicker and less expensive than litigating disputes in court. If you step back and think about who your adversary is and how the time and expense of litigation might impact all parties involved, you may conclude that having a more expensive and longer dispute resolution process is likely to save your company time and money.