Arbitration: Is It Right For Your Company?

Business disputes are inevitable.  They can occur within a company or between companies.  The forum and process for resolving disputes can differ greatly, and disputing parties have the opportunity to craft their own procedures for resolving their disputes. 

Arbitration is one of several processes available for resolving disputes.  Arbitration is an adversarial proceeding that offers a forum for dispute resolution outside of the supervision and control of the public court system.  Dispute resolution through arbitration occurs when individuals and/or businesses mutually agree for their disputes to be resolved by independent third parties not affiliated with the public court system.  The agreement to engage in arbitration typically is set forth in contracts signed by parties when the business relationship is first created, but an arbitration agreement can be created at any time – even after the dispute arises.

There are many forms of arbitration.  Arbitration can be binding or non‑binding, and arbitration proceedings can have a single decision maker or multiple decision makers.  Subject to some basic legal limitations, arbitration proceedings can be structured in any way upon which the parties can agree. 

Non-binding arbitration is relatively risk-free with the parties essentially getting an opinion from a neutral party.  However, since it is non-binding, the process may not be beneficial if the parties refuse to voluntarily go along with the decision or use the decision to fashion a mutually agreeable settlement.

This article examines general "pros" and "cons" for a technology-based company to consider in deciding whether to choose binding arbitration for dispute resolution.  The benefits and downsides to binding arbitration often hinge on the specific nature of a company's business and its organization.  Therefore, each company should consider these "pros" and "cons" in light of the company's particular circumstances. 

"Pros" of Binding Arbitration

  • Expediency

Dispute resolution procedures utilizing binding arbitration can be created to yield a faster result than typical dispute resolution through the public court system.  It is not uncommon for business disputes to languish in courts for a year or significantly longer.  In contrast, an arbitration agreement can provide for arbitration to occur within a set time period, possibly even 30 or 60 days.

  • Selected Decision makers

Parties can agree on the arbitrator or on how the arbitrator or arbitrators will be chosen, such as each party choosing one arbitrator, with the arbitrators selected by the parties then selecting another as the "neutral" arbitrator.  It is human nature to choose someone who would be favorable to one's position, and arbitration can give each party the ability to "pick" a decision maker of its choice.  The ability to select the decision maker for a dispute, even if it is just one of three or more decision makers, can be appealing to many companies because it gives a feeling of control over the proceeding.

  • Informed Decision makers

The American jury system is a model for creating a successful dispute resolution process.  North Carolina also is fortunate to have intelligent, hard‑working judges.  However, despite the overall merits of the jury system and the quality of judges, the decision makers in the court system often will have no knowledge of the technology issues pertinent to a dispute between technology-based companies.  Arbitration gives technology-based companies the opportunity to have arbitrators appointed who are knowledgeable about both the subject matter upon which a dispute may be based and the specific laws related to the issues involved.  An electrical engineer, for example, may be more qualified than an average juror to evaluate whether a former employee is using proprietary electrical equipment of a former employer in violation of a covenant not to compete.  Similarly, a computer specialist is more likely to know whether a piece of computer equipment was suitable for an intended purpose when it was sold by Company A to Company B.

  • Reduced Pre-Hearing Litigation

Arbitration agreements often limit or eliminate pre‑hearing discovery and pre-hearing motions, and thereby save the parties considerable expense.  Written questions propounded by the parties, oral examinations of witnesses under oath, and other types of pre‑trial proceedings can create a financial drain on companies and an emotional drain on its employees during the pendency of a dispute.  By limiting pre-hearing discovery and motions before the arbitration hearing, a company's financial and human resources can be directed and focused on company business instead of litigation.

"Cons" of Binding Arbitration

  • Forum Costs

While legal fees and other expenses may be reduced by arbitration, a private forum for dispute resolution carries its own additional costs.  Instead of using the publicly‑funded court system, arbitration employs private individuals to resolve disputes, and these individuals often are affiliated with arbitration organizations such as the American Arbitration Association or the International Chamber of Commerce.  Arbitrators typically charge a per-hour or per-day fee, and arbitration organizations have their own administrative fees which can exceed several thousands of dollars depending on the nature of the dispute. 

  • Limited Right To Appeal

North Carolina has a strong public policy favoring arbitration.  Therefore, if parties enter into an arbitration agreement, the North Carolina courts are not going to undermine that agreement or the decision reached in arbitration under that agreement, except in very limited circumstances.  The factual and legal issues underlying the dispute that were addressed in the arbitration proceeding generally will not be reviewed again by the courts, so the ability to seek relief in the court system from an adverse arbitration award is significantly limited.

  • Lack of Legal Expertise

Disputed issues subject to arbitration typically involve questions of law.  While there is benefit in choosing a non-lawyer arbitrator from a particular industry to resolve a dispute, this non-lawyer arbitrator may end up deciding legal issues.  It may not be possible to find someone with both the professional background useful to resolving the dispute and the legal knowledge needed as well, so parties may be stuck having legal issues decided by someone without any legal training or expertise. 

Binding arbitration can be an effective method of dispute resolution, but it is not for every company.  If a company is considering binding arbitration, the company should consult with an attorney about whether binding arbitration is appropriate for its business.  Once binding arbitration is determined to be the appropriate forum for dispute resolution, an attorney can draft an arbitration agreement that is in accordance with federal and state law.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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