Did you know that arbitration, which is often considered a less formal substitute for court litigation, can work both ways for small companies? In any case, it provides an efficient and cheap way of resolving disputes.
We will therefore examine the good and bad sides of arbitration so that you may make informed choices in this blog post.
Definition of Arbitration
Arbitration is a process of resolving private disputes in which an independent third party, called an arbitrator, listens to both parties and makes binding rulings.
In comparison to traditional court proceedings, this procedure is quick, confidential, and can be tailored for small firms.
Pros of Arbitration for Small Businesses
- Cost-Effective: Arbitration is often cheaper to go through the arbitration process than through lengthy court proceedings, which is favourable for small businesses. According to the American Arbitration Association, businesses can save up to 50% on dispute resolution costs through arbitration compared to traditional litigation.
- Confidentiality: Arbitration processes are confidential and private, thereby ensuring that business secrets are not revealed to competitors who could benefit from them.
- Flexibility: Arbitration also provides a more flexible scheduling process and procedure so that firms can choose the timelines and rules that best suit them.
- Expert Decision-Makers: Parties may select arbitrators with specific expertise in the industry, making sure that a knowledgeable and fair decision is made.
- Faster Resolution: In comparison with court cases, arbitration tends to be faster resulting in reduced interruptions in business operations and thus fast recovery.
- Enforceability: Arbitration awards tend to be legally binding and easier to enforce internationally. This assurance is necessary when dealing with cross-border commercial disputes.
- Preservation of Relationships: An arbitration’s less adversarial approach helps maintain professional relationships, something crucial for ongoing business partnerships.
- Limited Appeals: With the limited grounds of appeal, arbitration is conclusive and certain enabling businesses to avoid protracted court battles.
- Flexibility in Process: It could be more convenient for small-scale firms if parties decided on procedures like dates and venues in arbitration.
- Limited Discovery: Discovery in arbitration normally has less scope compared to litigation thereby cutting down on time and cost of collecting extensive evidence.
Cons of Arbitration for Small Businesses
- Potential High Costs: Though cheaper than litigation, arbitration can still be expensive especially in complex cases, with high fees for arbitrators and administrative expenses that may put small business budgets under pressure.
- Discovery Process Limited: The discovery process is often limited during arbitration. This may disadvantage small businesses that depend on thorough investigations to build their case.
- Decisions are Final: Most arbitration decisions are binding and final but have few grounds of appeal which leaves small businesses with little to do in case they become unsatisfied with the decision.
- Lack of Transparency: Arbitration has been known to lack transparency since it is conducted privately. It can be difficult for small companies if the process appears biased.
- Power Imbalance: Larger businesses, with more resources, may influence the choice of the arbitrator or even determine the procedure itself which might disadvantage the smaller ones.
- Enforceability Issues: Although arbitration awards are generally enforceable, complications can arise in enforcing decisions across different jurisdictions, particularly in international cases.
- No Jury: Arbitration does not involve a jury, which could be a disadvantage if a small business believes a jury might be more sympathetic to its position.
- Inconsistent Outcomes: The lack of standardised rules in arbitration can lead to inconsistent outcomes, creating uncertainty for small businesses relying on predictable legal standards.
- Limited Right to Appeal: Arbitration decisions are usually final and binding, offering little to no opportunity to appeal, which can be a disadvantage if the outcome is unfavourable.
- Potential for High Costs: While arbitration can be cost-effective, fees for arbitrators and administrative expenses can add up, sometimes making it as expensive, if not more so, than court litigation.
When Should You Go for Arbitration
- When Privacy is a Priority: Opt for arbitration if you want to keep the dispute confidential as arbitration proceedings are private in contrast to court trials that are generally open.
- When Speed is Essential: Arbitration is usually quicker than court litigation and so it is a preferred method when companies need a fast resolution of disputes for business survival.
- When You Seek Expertise: Arbitration allows for the selection of an arbitrator who possesses specific expertise relevant to your industry, thus ensuring better-informed decisions in technical or specialised disputes respectively.
- When You Want to Avoid Courtroom Formalities: Unlike court proceedings, arbitration is less formal allowing the possibility of a more flexible process and thereby reducing stress as well as providing more opportunities for settlement creativity.
- When Cost Control is Important: Despite being costly at times, arbitration often has more predictable costs and lesser extended expenditures than litigation thus making it best placed for managing legal budgets.
Conclusion
Arbitration gives small businesses a means of resolving disputes that is flexible as well as being confidential but it has its own drawbacks such as no appeal except for certain legal rights. This way, you can be sure that arbitration is the best solution for your business needs.
