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October 31, 2014

Cost of Arbitration

In Today’s Legal Environment Arbitration is Not Always the Low Cost Alternative

By Attorney Michael O’Shaughnessy, Managing Partner at Colombo & Colombo, P.C.

During the past few decades the inclusion of a “Forced Arbitration” clause was commonly recommended for employers to include in their employment contracts. The primary rationale for this was that arbitration is faster and less costly compared to going to court. However, given the changes in arbitration costs and processes during recent years, it might be wise to rethink the automatic inclusion of arbitration clauses in legal contracts.

In a 2012 case study published by Inside Counsel, 19 single-plaintiff cases (nine resolved through arbitration and 10 resolved in court) were analyzed to determine whether to apply arbitration broadly or on a case-by-case basis. Although this study analyzed employment-related disputes, the results can be extrapolated to estimate costs and time to resolve all types of disputes, including business and consumer-related disputes. The following are the results of this study:

Total Costs

  • The 9 arbitration cases incurred $921,042.22 in total costs and outside counsel fees; an average of $102,338.02 per case.
  • The 10 litigation cases incurred $704,908.20 in total costs and outside counsel fees; an average of $70,490.82 per case ($30,000 less per case vs. arbitration cases.)

Start–to–Finish

  • Arbitration cases averaged 21 months.
  • Litigation cases averaged 19 months.

Source: “Which costs less: Arbitration or Litigation?”, by Alan Dabdoub and Trey Cox, Dec. 6, 2012, www.insidecounsel.com

Looking Beyond the Dollars

There are other assumptions pertaining to the benefits of arbitration that might not be as true today as they were in the past:

  • Whether in court or arbitration, moving the matter quickly is always important to overall costs. The discovery process that is common in litigation is now also common in arbitration as well. This lengthens the process and as a result, also the cost.
  • Arbitrators are not necessarily required to render decisions consistent with the law. Arbitrators do not have to follow rules of evidence like a court, which means that otherwise inadmissible evidence may be allowed.
  • Because decisions can be made on the grounds of what the arbitrator perceives to be fair, rather than what the law directs, bias and fairness have become hot button issues in the arbitration industry today. As the arbitration business has grown, so has the influence of arbitrators whose revenue depends on it.
  • Baseless claims are easier to bring forward during arbitration, costing unnecessary time and money to defend.
  • Arbitrators are not necessarily well versed in the area of law a case requires. As a result, their decisions may be inconsistent and contrary to precedents that may apply. Although this might not be a problem in a simple dispute, the ramifications could be significant if the claim is based on complex matters.

While arbitration is still a viable course of action in certain instances, in today’s legal and business environments it may be prudent to give yourself options when drafting the dispute resolutions in an employee contract. For instance, there are cheaper venues for arbitration other than AAA.

About the Author

Michael O'ShaughnessyWith 30 years of experience as a litigator, attorney Michael O’Shaughnessy knows how to cut through any hidden agendas or manipulation his client might be up against and get the best possible outcome for the client. He is known for the depth and breadth of his expertise and for his approach to client service that is responsive, concise and straight to the point. He knows the work he does directly impacts his client’s business. Michael is the Managing Partner at Colombo & Colombo, P.C. You can contact him by calling his office at 248-645-9300, or by sending an email to MJO@colombopc.com. The firm’s website can be viewed at www.colombopc.com.