Business and Legal Insights

Many types of contracts require the parties to submit their disputes to arbitration. For example, arbitration clauses are common in consumer agreements, such as car leases and gym memberships. While a consumer can negotiate certain terms, like price, most of the provisions are not negotiable.

While the consumer may be stuck arbitrating, commercial parties often negotiate every last term of their agreements. This includes whether to require the parties to arbitrate their disputes or take them to court. There are advantages to each, so here are five things to consider when deciding whether to include an arbitration clause in a real estate contract, such as a purchase and sale agreement or lease.

1. Time.  Generally, arbitration moves faster than litigation. One reason for this is that it is typically easier to schedule time with an arbitrator than getting in front of a judge. Even if the arbitrator does dispute resolution full time, his or her caseload will be a fraction of a judge’s.  Arbitrators can also set schedules and deadlines as they deem appropriate. When an issue arises in arbitration, the parties may get in front of the arbitrator within days, while it could take weeks or months to get in front of a judge.
2. Money.  There are plenty of variables that can impact the cost of resolving a dispute: the subject matter, the amount of discovery, whether expert witnesses are involved, how long the case lasts, and many more. Arbitration, however, requires a particular expense that litigation does not – the arbitrator’s hourly fee. Most arbitrators bill by the hour, just like the parties’ counsel. Every time the arbitrator conducts a hearing or reviews a document, he or she is billing for it, and that expense is split by the parties (and is often prepaid by the parties through required deposits).  Some arbitrations have three arbitrators, so the expense there is even greater. By contrast, a judge does not charge for his or her time working on a case. While arbitration often offers a cost savings relative to litigation, some of those savings could be lost to the arbitrator’s fee.
3. Convenience. In arbitration, the final hearing – the equivalent of a trial – is typically done in person, just like it would be in court. But conferences and hearings before that are often done by phone. This is convenient for the parties and their counsel, and may reduce the expense of the case. The final hearing is often held in a law firm’s conference room, where amenities may be greater than in a courthouse.
4. Discovery. This process may include depositions, the exchange of documents, and responding to written questions. In court, discovery may proceed largely unfettered and is a substantial driver of cost in litigation. In arbitration, discovery is often quite limited. Arbitrators may restrict the number of depositions the parties can take, what categories of documents they must exchange, and the time frames for doing all of these things. While this may lower the cost, it may make the attorney’s job tougher. For example, the arbitrator may not let your counsel depose a key witness for the other side. And, as discussed in the next section, there’s usually nothing you can do about it.
5. Rules. When you’re in court, the judge will apply the rules of civil procedure, rules of evidence, and whatever laws may apply to the dispute. The parties may disagree with how the judge applies those rules and laws, and if they do, in many instances they can appeal to another court.  In arbitration, the rules of procedure and evidence are substantially relaxed, though substantive laws still apply. Arbitrators tend to allow more evidence in than they keep out. And if you lose, the right to appeal the final decision (or “award,” in arbitration lingo) is extremely limited. In short, in arbitration, you’re stuck with whatever rulings the arbitrator makes.