THE BENEFITS OF ARBITRATION COMPARED TO LITIGATION

            The debate surrounding litigation vs arbitration have raged on for decades. However, once the Covid-19 pandemic hit, many legal professionals adopted the idea that arbitration can be more beneficial than traditional litigation.[1] The mass shutdowns of the pandemic had a disparate impact on the court system, and led to a huge backlog of cases.[2] Many businesses were left with no choice but to wait extensive time frames to have their cases tried.[3] Extended time frames are not the only reason that arbitration can be more beneficial than litigation. This article will discuss the benefits of arbitration compared to litigation, and why it could be more suitable for a business to think twice before choosing the traditional litigation route.

            A very attractive feature of arbitration that does not typically arise with litigation is the benefit of neutrality.[4] If a company regularly conducts business with out-of-state businesses, neutrality can be of great importance. With litigation, jurisdictional requirements will determine where the case will be tried.[5] However, with arbitrations, the participants are able to choose a neutral forum for their case to be arbitrated.[6] This factor takes away the “home-court advantage” and can provide for a seemingly fairer process.[7] Common arbitration destinations in the United States are New York, Miami, and Houston.[8] Litigants can also choose how many arbitrators will resolve the dispute.[9]

            Not only does arbitration provide great flexibility, but it’s typically much cheaper than litigation.[10] Arbitration typically only results in attorney fees and arbitration fees.[11] Litigation charges include court fees, hefty attorney fees, and often expert witness fees.[12] Arbitration is also generally less expensive because discovery is more limited than a traditional court proceeding.[13] Litigation typically requires each witness to testify twice (at depositions and trial), whereas depositions in arbitration are very rare.[14] Arbitrations typically rely on direct testimony through written statements and hearings are focused around cross-examinations.[15] Lastly, parties in the dispute have the option to modify the arbitration process to suit their needs and cost limitations.[16] Combining each of these specific features generally leads to arbitration being more cost-friendly than litigation.

            If a business is looking for a quick dispute resolution, arbitration is preferrable compared to litigation.[17] Arbitrations can be completed in as short as 45 days, whereas litigation in civil court is generally resolved one year after filing the case.[18] Delaware, the leading state for incorporating businesses, has made it even easier to complete arbitration quickly.[19] As of 2018, over 1.3 million businesses were incorporated under Delaware.[20] Delaware enacted the “Delaware Rapid Arbitration Act” (DRAA) in 2015, which “streamlines” the process for beginning an arbitration and sets tight deadlines for concluding the process.[21] Financial penalties are imposed on the arbitrator if a final decision is not reached within 120 days of filing.[22] Therefore, businesses can typically ensure their dispute will be resolved in just under four months.[23] No matter which state a business is incorporated in, it is very common for arbitration to resolve much faster than traditional litigation.

            Although arbitration can benefit many different types of companies, there is one type of company relationship that can disrupt the benefits of arbitration. When a parent company owns a subsidiary company, and the subsidiary has entered into an arbitration agreement with a supplier, the parent may not be bound.[24] In Thomas-CSF, S.A. v American Arbitration Ass’n, a corporate parent who had recently acquired a subsidiary, brought an action against the subsidiary’s supplier.[25] Prior to the acquisition of the subsidiary to the parent, the subsidiary had entered into a binding arbitration agreement with its supplier. [26] The parent brought suit and claimed that they were not bound by the arbitration agreement between the subsidiary and supplier.[27]

            The United States District Court of New York denied the parent’s request for injunctive relief and granted the supplier’s motion to compel arbitration.[28] The Court of Appeals then reversed and remanded the case, holding that the District Court improperly concluded the parent was bound by the arbitration agreement.[29] The Court says, “[A]rbitration is contractual by nature, a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.”[30] This rule is not absolute, however. A party can be bound by a non-signed arbitration under five circumstances.[31] These circumstances are:1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel.[32] The Court went onto a lengthy discussion explaining why each circumstance fails to hold the parent liable under the arbitration agreement in this case.[33]

            Overall, arbitration can be a great dispute resolution process for many types of companies, in the United States and abroad. Arbitration is known for being cost-efficient, shorter, and more flexible than litigation.[34] Keeping these benefits in mind, it is important to recognize that enforcing arbitration agreements on parent companies that own a subsidiary can be difficult.[35] Walking through the five factors of the Thomas-CSF, S.A. case can help a parent company determine if they would be bound by their subsidiary’s arbitration agreement. Once it is determined that arbitration will work in a specific scenario, it is a great method to having disputes resolved quick and efficiently.

[1] Joe Meadows, Why You Should Consider Opting for Arbitration During the Coronavirus Pandemic, American Bar Association, (Nov. 30, 2020), https://www.americanbar.org/groups/litigation/committees/commercial-business/practice/2020/opt-for-arbitration-during-coronavirus-pandemic/.

[2] Id.

[3] Id.

[4] Arbitration vs. Litigation in the US, Westlaw, https://1.next.westlaw.com/Document/Icb117b60f9e711e698dc8b09b4f043e0/View/FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true (last visited, Feb. 18, 2022).

[5] Federal or State Court: Subject Matter Jurisdiction, FindLaw, (Jan. 18, 2017), https://www.findlaw.com/litigation/filing-a-lawsuit/federal-or-state-court-subject-matter-jurisdiction.html.

[6] Supra note 4.

[7] Id.

[8] Id.

[9] Id.

[10] Emily Holland, Arbitration vs. Litigation: What is the Difference?, ADR Times, (Mar. 25, 2021), https://www.adrtimes.com/arbitration-vs-litigation/.

[11] Id.

[12] Id.

[13] Supra note 4.

[14] Id.

[15] Id.

[16] Id.

[17] Three Reasons Why Arbitration Can Be Better Than Litigation, Schorr Law, (Dec. 23, 2021), https://schorr-law.com/three-reasons-why-arbitration-can-be-better-than-litigation/.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Three Reasons Why Arbitration Can Be Better Than Litigation, Schorr Law, (Dec. 23, 2021), https://schorr-law.com/three-reasons-why-arbitration-can-be-better-than-litigation/.

[24] Thomson-CSF, S.A. v. Am. Arb. Ass'n, 64 F.3d 773, 773 (2nd Cir. 1995).

[25] Id. at 775.

[26] Id.

[27] Id.

[28] Id. at 773.

[29] Id. at 780.

[30] Thomson-CSF, S.A. v. Am. Arb. Ass'n, 64 F.3d 773, 773 (2nd Cir. 1995) (citing United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 574 (1960).

[31] 64 F.3d at 776.

[32] Id.

[33] Id.

[34] Supra note 4.

[35] 64 F.3d at 773.