Arbitration clauses are very common in contracts in the construction and energy industries.  Many industry players reflexively  insist on arbitration despite its pitfalls.  While arbitration has its place, a bench trial is a viable alternative to arbitration.

Bench trials are simply trials to a judge rather than a jury.  Parties may agree to a bench trial in a contract by agreeing to waive their rights to a trial by jury (i.e., a jury waiver).

When drafting a contract and trying to decide between an arbitration clause and a jury waiver, consider the following factors:

Expense – Contrary to popular belief, arbitration is very expensive.  The fees associated with filing the arbitration and paying an arbitrator, the arbitral administrative organization (e.g., AAA or JAMS), and the court reporter fees are often substantial.  In contrast, the filing fee for a lawsuit is nominal, and the judge and his/her court reporter are essentially free (they are paid with your taxes).

The Right to Appeal – The grounds to vacate an arbitration award are very narrow.  Consequently, arbitration awards are seldom vacated by the courts.  This is the biggest drawback of arbitration.  Because it is so difficult to reverse an arbitration award, placing your fate in the hands of an arbitrator is risky and could be fatal.  On the other hand, appellate courts have broad powers of review over trial courts and routinely reverse trial courts for many reasons.

Confidentiality – Arbitration, unlike a bench trial, is a private proceeding that is closed to the public.  Further, the documents filed in the arbitration, subject to the arbitrator’s rules and the parties’ agreement, may be kept confidential.  Although a trial is public, the trial court can protect a party’s confidential information by entering a protective order and requiring confidential documents to be filed under seal.

Freedom to Choose the Fact Finder – The parties pick the arbitrator, but they cannot pick the judge.  This is an advantage of arbitration.  It allows parties to pick a fact finder that both believe will be fair.  It also allows parties to pick a fact finder with expertise relevant to the subject matter of the dispute.  Picking someone with expertise may reduce the risk of a mistake on a key issue that depends upon understanding a specialized area of law or a specific industry.

Enforceability – In many foreign countries, arbitration awards are generally more likely to be enforced than a judgment from a court located in the United States.  If you are contracting with a foreign entity with assets overseas but no assets in the United States, then, in these circumstances, arbitration may be preferable to a lawsuit because of the question of enforceability.

 The Bottom Line

Arbitration is expensive and the limited appellate review of an arbitration award makes it potentially dangerous.  Nevertheless, arbitration will always have its place.  Arbitration is and will remain preferable for certain disputes because it offers privacy, the freedom to select the fact finder, and is more likely to be enforced abroad than a judgment.