You may have encountered an arbitration clause in a contract and wondered what it is and whether you should be happy or upset about this clause. Or if someone may have given you a piece of advice to include an arbitration clause in a contract, and you were left wondering how and why could this benefit you.
What Is Arbitration?
Arbitration is one form of what is commonly known as Alternative Dispute Resolution. It’s a process where both sides come together and agree to follow and respect the decision of the arbitrator. This is one route you can try instead of filing a lawsuit and going to court to resolve a dispute. The arbitrator is usually an attorney familiar with the field of law being decided. The decision of the arbitrator is legally binding against both parties, although the decisions may be appealed, in some cases. Arbitration is used as a private form of settlement between parties by appointing individuals as arbitrators is considered a useful means of prompt and fair settlement of disputes that may result from commercial transactions in the field of goods and services. Arbitration has numerous advantages for the parties implicated in the dispute through their trust in the arbitrators, the confidentiality of information, the speed of adoption of the solution, low court fees and the possibility of international recognition of arbitration awards.
What types of disputes can be resolved by arbitration?
Arbitration can be voluntary (the parties agree to do it) or mandatory (required by law). Most contract arbitration occur because the parties included an arbitration clause requiring them to arbitrate any disputes “arising under or related to” the contract. However, arbitration is not possible when there are claims relating to:
- family law;
- rental contracts for accommodation, including disputes relating to the validity, termination and qualification of such contracts;
- patrimonial property rights;
- the alienation of property in the public domain;
- life and health;
- non-property rights of intellectual property;
- other litigation in respect of which the law delegates the exclusive jurisdiction of the courts.
What is litigation?
By the term “litigation“, we mean going to court for settling the dispute between or among parties. It is a legal proceeding initiated between the opposing parties, with the aim of enforcing or defending the legal right. In this process, the case is brought to the court, wherein the judge (appointed by the court to act as the litigator) gives his/her verdict on the issue after considering the all the arguments, evidence and facts presented by the lawyers of the parties. If the parties do not agree with the decisions of the court, they can appeal to a superior court for getting justice, provided certain conditions are fulfilled. The court has a definite and formal procedure for settling the conflict between the parties concerned, which should be followed strictly. However, due to the rigidity and high cost involved in the litigation process, there are instances when parties go to arbitration.
Key Differences between Arbitration and Litigation
1. The main difference between arbitration and litigation law is that court is involved in the case of litigation, as it is a lawsuit, whereas, in arbitration, a settlement between the parties is done outside of court.
2. Arbitration is a method of resolving the dispute in which a neutral third party is appointed to study the dispute, listen to the parties and then make recommendations. On the other hand, litigation is described as a legal process in which the parties resort to the court for the settlement of disputes.
3. Arbitration is always civil in nature. Conversely, litigation can be civil litigation or criminal litigation.
4. Arbitration is a private method of resolving controversies between the parties, where complete confidentiality is mandatory. On the contrary, litigation is a public procedure.
5. The cost of the arbitration process is comparatively lower than the litigation.
6. The decision made by the judge is final and binding in nature, and so further appeal cannot be made. On the contrary, in litigation, the litigants can appeal to higher court, if they do not agree with the decision made by the court, but subject to certain conditions.
Perhaps after reading all of the above you would think that arbitration is the better dispute resolution method, however, that is not necessarily the case. In general, arbitration may be the better option if the agreement you wish to settle is so technical that you would prefer to have (an) experienced arbitrator(s) resolve it in the case of a dispute. Also, arbitration may be the better option if the value of said agreement justifies paying the significant arbitration costs. On the other hand, if you wish to enter a standard type of agreement (for example, an annual lease agreement), then choosing litigation could be the better option.