The Pros & Cons Of Arbitration In Business Collections

Arbitration is an alternative to litigation where, instead of suing in court, you agree to let a third party decide your case.  Compared to litigation, it offers both advantages and disadvantages.  This article will discuss the pros and cons of arbitration in business collections.

How Arbitration Works In Business Collections

Arbitration is similar to litigation in that you exchange discovery and present evidence, but the hearing is less formal and evidence rules are relaxed.  At the end of the process, the arbitrator issues a decision (called an award), which you can bring to court and convert into a judgment. 

Pros And Cons Of Arbitration In Business Collections

Consider the following advantages of arbitration compared to a collection suit:

1. Arbitration Lets You Choose The Arbitrator
   In litigation, you don’t get to pick a judge.  But in arbitration, you and the customer can agree on an arbitrator, including someone with specific knowledge of your industry. 

2. Arbitration Is Private
   In litigation, everything in court is a public record.  A person could watch your trial, read a transcript, or view anything filed in the case.  But arbitration is confidential and lets you keep your dispute private.

3. Arbitration Can Be Faster Than Litigation
   In litigation, it can take a year or more to go to trial.  But in arbitration, you can often get a hearing and award much faster.

However, consider these disadvantages as well:

1. Arbitration Results Are Not Appealable
   In litigation, if the judge makes a legal error, you can appeal to a higher court.  But in arbitration, the arbitrator’s decision is final.  The grounds for vacating an award are limited to rare issues like corruption, fraud, and evident partiality.

2. Arbitration Results Can Be Arbitrary
   Because arbitration is unappealable, the result can be arbitrary.  In litigation, the judge must follow the law, but in arbitration, the arbitrator can ignore it.  For example, if your customer owes you money under the law, a judge has to rule in your favor.  But if the arbitrator cuts your customer a break, there’s nothing you can do about it. 

3. Arbitration Can Get Expensive
   In litigation, you pay your lawyer and court costs like filing fees, but these court costs are generally minor.  In arbitration, you pay your lawyer plus arbitrator fees, and a filing fee which can be thousands of dollars.  As a percentage of most collection cases, arbitration can be cost-prohibitive. 

All of this leads to a word of caution: know what your own contracts say about arbitration, and what your customers would have you sign.  If arbitration is impractical, you don’t want an arbitration clause that forfeits your right to sue.

For more information on business collections, or if you’d like to discuss a specific collection issue, call me at 856-667-1669 or contact me here.

This material is for informational purposes only and should not be construed as legal advice.  No person should rely on this information without seeking the advice of an attorney.