Arbitration vs. Litigation – Does It Really Make a Difference?

Short answer: Yes.

Long Answer: YES.  A significant difference. Not many businesses can afford to litigate “for the principal” anymore and perhaps as a result mandatory arbitration has become an increasingly popular dispute resolution clause in many contracts and other documents controlling how your business operates, such as your companies’ Operating Agreement.  Today these provisions appear in the most basic contracts however, parties often insert an arbitration provision without a true understanding of either the cost or effect an arbitration clause has on both a dispute and its outcome.  In some instances, arbitration can be a far less desirable option, take longer to reach resolution and even be a much more expensive alternative to the court system.

Contested cases in New Jersey’s Law Division (generally over $15,000) usually take 18-24 months to reach a trial.  Suits in New Jersey’s District Court (generally over $75,000) usually take 12-18 months to reach trial. Smaller disputes, (generally less than $15,000) can go to trial in the Special Civil Part of the New Jersey Court system in less than 6 months. The time frames for a dispute in Pennsylvania are not significantly different.

By comparison, it is not likely an arbitration will be scheduled more quickly than four months from the date the complaint is issued.  And such cases reaching a quick resolution require cooperation between the disputing parties, something usually not present if you are in a dispute.

The cost of administrating an arbitration, with AAA Arbitration, for example, let alone engaging arbitrators, often makes simple disputes much more expensive than litigation.  The filing fee to a court is usually a one-time, upfront cost in the range of $100-500.  By comparison, arbitration filing fees are $3,500 or more, with ongoing administrative costs, plus the cost of an arbitrator (or arbitrators) at a daily or hourly rate, in addition to the cost of your own lawyers and experts.

Those numbers add up quickly.

Arbitration involves a process much like a lawsuit where there is a complaint and a response.  Discovery, which involves an exchange of documents and depositions can be similar to that provided by the Court rules in litigation, or be limited by agreement among the parties and arbitrator(s).

The arbitration itself is usually held in an atmosphere more relaxed than a formal courtroom.  Instead, the parties meet in a conference room rather than a courtroom with the arbitrator(s) directing the procedure, typically in a format loosing following that of a trial.

In addition to the actual arbitration cost, the hidden cost can be the lack of discovery. In litigation, the parties use a variety of vehicles to obtain information during the discovery phase. Lawsuits are filed based upon allegations, which need to be proven by the party filing the lawsuit.  Similarly, allegations in an arbitration matter are presented in an arbitration demand.

Most arbitrations involve only the request for, and exchange of, documents and are conducted without depositions, a staple in most litigation and although expensive, truly the way to expose problems in your opponents’ case and to evaluate witnesses who will testify at trial. Without extensive prehearing discovery, parties can find themselves flying blind during the arbitration about what witnesses will say, what documents exist or what information they hold.


In complex matters, especially those that rely on information exclusively in the hands of the opposing or third parties, arbitration may not be the preferred method of dispute resolution.  Obviously, though, for simple matters, limiting the amount of discovery available to adversarial parties can limit your overall costs.

In either event, as you can see these are decisions best made on a case by case (no pun intended) basis.  If your dispute is less than $10,000 and your documents require AAA Arbitration, with three arbitrators, you’ve spent $10,000 likely before you are sitting at a table ready to resolve the dispute.

In addition, many arbitration provisions are silent on how the arbitration is conducted.  Such issues as the venue, the number of arbitrators, and the qualifications of the arbitrators are important considerations.  Conducting an arbitration in a remote location can be an expensive proposition.  As described previously, more painful may be a provision calling for multiple arbitrators.  Arbitrators are paid for their time to prepare for and preside over the matter by the day or hour.  The least expensive arbitrators usually charge $150 an hour, while the most expensive might charge $400-$500 an hour or more depending on their area of expertise.

And do not forget you will need to pay your lawyer.  Please.

Arbitrators are sometimes, but not always lawyers, and many are former judges.  While the parties can request arbitrators with certain qualifications, there are no guarantees about the training and experience of the person who will preside over your case.

A positive aspect of Arbitration is that it is usually binding.  This means the decision of the arbitrator(s) is final with only very limited appellate rights.  Court decisions can usually be appealed.  Arbitration should not be confused with mediation, which is a non-binding process in which a mediator attempts to bring the parties to a resolution of their dispute in an even more informal setting.

Arbitration is a viable alternative to litigation, however serious thought to the many above factors should be considered before drafting or signing documents containing an arbitration provision, rather than retaining your right to litigate disputes.

If you have controlling documents, or are presented with a contract containing an arbitration provision, feel free to contact Bergmann & Good for advice prior to making the best decision for both you and your business.

Make Room on Your Business Team for Debby Downer

Every small business should start with at least three essential outside team members: a small business accountant, an experienced commercial insurance agent and a small business attorney. Just as you should not wait to look for a lawyer until you’ve been sued, 10 months into your new business venture is also not the time to search for an accountant.

Needless to say, after the pipes burst is not the ideal time to start looking for your insurance agent, and no one starts looking for an account the day after their taxes are due, so why wait to look for a business attorney?

Everyone remembers Debby Downer, the Saturday Night Live character who just loves to bear the bad news.  As a business litigator, I think we have something in common.  Considering all the downsides is just as important as the upsides to the day-to-day operations of your business.  There is a lot the small business owner should know and it is much easier (and less expensive) for you to learn from the mistakes of others.  Your business attorney, or Debby Downer, probably has lots of stories about things gone wrong.  People work with people whom they like and trust and I would like to think we here at Bergmann & Good are a bit more fun to be around than Debby.  Take your business lawyer’s advice and listen to the war stories.  Don’t be at the center of the next piece of avoidable litigation.

Take the time to interview an accountant, a lawyer and a commercial agent before you take the deep dive into the world of small business.  Civil litigation is not something any new business can afford and not being properly insured can put you out of business quickly.  What I hear most often from established small business owners is: “I’ve been in business for 20 years and never been sued.”  That’s fantastic, but what if you were sued?  Court imposed response timelines are tight and scrambling for counsel, even against frivolous claims is very time-consuming.  Would you feel better working with something who knows not only you, but the internal workings of your business rather than your Uncle’s neighbor, Jan, a divorce attorney?

The best use of a your small business attorney is as a partner to guide and protect you in all aspects of opening, running and even selling a business–before you’re faced with legal issues.  Pre-litigation counseling is a much better use of your resources, rather than hoping you never need to hire an attorney.

Some areas a business attorney can guide you through include:

  1. Contract and/or lease negotiation and review;
  2. Developing employee, office and business policies for recruitment, hiring, discipline and termination;
  3. Creating non-compete and confidentiality agreements;
  4. Business succession planning;
  5. Creating and protecting intellectual property;
  6. Regulatory compliance;
  7. Banking and finance law;
  8. And, of course, litigation.

Small business owners dread the idea of dealing with lawyers because they assume the business cannot afford it.  Lawyers are expensive. For this reason many business owners simply avoid investing in legal counsel until there is simply no choice.  There are better ways to address this very basic business need.  Simply incorporate an attorney as part of your ongoing business expenses.  Budget for the unexpected litigation, and when it never happens, your end-of-year bottom line will be better than expected.  Once you develop a relationship with a business attorney, there are many things than can be resolved via a fixed fee, which of course, allows the small business owner certainty and the ability to budget for necessary work. By having an ongoing relationship with your very own Debby Downer, including basic litigation avoidance counseling, you just may avoid the problem altogether.


My Company Has Been Sued – Now What?

When your business is either sued, or simply faced with the prospect of litigation, your businesses records will likely come under scrutiny during the process. Most small to mid-sized businesses focus on the daily operations of their business, as they well should, but simple policies and procedures can protect you in the event the dreaded lawsuit arrives at your door. Think about the 4th generation business – a mid-sized company doing well with records going back to the 1970’s. If that business does not have a records retention and/or document destruction policy in place, and finds it easier to simply pile filing cabinet after filing cabinet in the “back room” the prospect of producing decades of documents can threaten the very health of such a company.

Once litigation is either threatened or has been initiated, both sides in any dispute must immediately cease the routine destruction of any documents that may be relevant to the issues at stake. This means employees cannot delete emails, clean out files, clear hard drives, or destroy paper documents. If you have a server that routinely cleans out archived documents and email, having a clear and simple document destruction policy in place for your business is just the first line of protection. It is likely that once litigation is commenced, your attorney and/or opposing counsel will send you a “litigation hold notice” which explains the obligations your business has to protect information relevant to the dispute. Failure to do so has a significant negative impact, such as the Court sanctioning the offending party including a presumption that what your business may have innocently and unknowingly destroyed contained documents proving your opponent’s case. This is, of course, fatal to your claims or defenses.

So now imagine that same 4th generation business is served with document requests including “all corporate minutes and financial information going back 10 years.” Unfortunately, you still have those records, which means your business will not only have to pay to have them copied and coded electronically, it will have to pay the company’s attorney to review them and properly produce relevant documents.

This task alone could mean this otherwise successful business will not make it to the 5th generation.

Now imagine that same business has a records retention policy requiring all financial information to be destroyed after 7 years, and all non-financial information be destroyed every 24 months. Once litigation is commenced all the record destruction would cease, regardless of the companies’ destruction policy, but it leaves a manageable mountain of information to sort through and resolve the dispute.

No small or mid-size business owner wants to think about litigation – but they should. Simple preventative measures can mean the difference in winning or losing your case. For most small businesses, even minor litigation can quickly become a “bet the company” case. Take precautions and have a document destruction policy in place. Educate your employees about the terms of your policy. Prevention is the best way for a business to survive litigation of any size. Bergmann & Good can craft a simple yet effective policy not only tailored to your business, but to your industry as well.

Call us if you would like more information