Arbitrate or Litigate? The Differences

It has become increasingly common for commercial contracts to include mandatory arbitration clauses, which force any disputes arising out of the contract to be settled by an arbitrator, rather than through traditional litigation. Many of our clients are unclear as to the costs and benefits of such arbitration provisions. This article seeks to educate our clients about the crucial differences between arbitration and litigation.

For most people, the biggest advantage of the arbitration process is the reduced costs. Although paying for an arbitrator can be expensive, most arbitrations are concluded less expensively than traditional litigation. This is because arbitrations often take significantly less time to resolve than a lawsuit in district or superior court. Generally, a traditional lawsuit can take many months to get to the trial stage, and the costs of obtaining discovery and other attorney’s fees can accumulate over this time. By contrast, an arbitration can take place in a matter of weeks, if not days. Although this “limited discovery” can keep costs down, it also makes it more difficult for your attorney to obtain all the relevant information about the case, which in turn makes it more difficult for the attorney to explain the evidence to an arbitrator.

An arbitration can also be less expensive for a client because of the lack of an appeals process. In traditional litigation, a losing party always has an opportunity to appeal an unfavorable decision, and a case is not resolved until that appeals process has run its course. However, an arbitrator’s decision generally cannot be appealed, except in very limited and rare circumstances. Generally, an arbitrator’s award can be overturned in Court only if there has been fraud or an abuse of discretion, which is difficult to establish. Although this has the benefit for the client of finality, it also deprives the client of the opportunity to re-litigate a wrong decision.

Arbitrations also have the benefit of privacy, because unlike traditional litigation, an arbitration dispute and the terms of any decision can remain confidential. In addition, an arbitrator is also commonly selected because of his or her familiarity with a particular industry. Unlike a judge who may know very little about the context of the dispute, an arbitrator will likely have a specialized understanding of the nature of the conflict and the surrounding circumstances.

One distinct disadvantage of arbitration is that a successful party could receive a reduced amount of interest on an award. Under Massachusetts General Laws c. 231 � 6C, a successful party in traditional litigation can receive interest on an award at a rate of 12% per annum (or at contract rate) from the date of the breach or the date of demand. However, Sansone v. Metropolitan Property & Liab. Ins. Co. (1991) has made clear that the statute does not apply to an arbitrator’s award, and a court cannot award pre-judgment interest if the arbitrator’s award is silent on the issue.

Finally, clients should also be aware that an arbitrator will generally have the authority to decide a case under Massachusetts General Laws c. 93A, the state’s consumer protection statute. In the Drywall Systems Inc. v. ZVI Const. Co., Inc. (2002), the Supreme Judicial Court held that not only was a claim under Chapter 93A subject to arbitration, but the arbitrator could award punitive damages and attorney’s fees. The Court held that the statutory right in Chapter 93A to attorney’s fees overrode the statutory prohibition against an arbitrator awarding them. Clients who wish to limit multiple damage claims under 93A should do so by the terms of their agreement to arbitrate.