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Is Arbitration Really a Good Deal?

By Robert B. Bodzin

For decades, many commercial contracts have contained dispute resolution provisions calling for mandatory arbitration and/or mediation before the American Arbitration Association (“AAA”). These provisions are intended to reduce the costs of dispute resolution between commercial parties. However, many commercial litigators and their clients have recently discovered that the total costs of AAA arbitration are often equivalent to – or even exceed – the costs of litigating in court. Really? Yes it’s true.

The reasons for the high costs are inherent in the design of AAA’s fee structure. In addition to the hourly rate for the pretrial, trial and “review” services of between 1 and 3 arbitrators (typically in the range of $400 to $500 an hour), AAA charges significant administrative fees. Discovery expenses add to the bill since the parties are also paying for the arbitrators to manage, evaluate and resolve discovery disputes. Thus, relying on arbitration or mediation at all costs can be quite costly.

In response to the high costs of arbitration, various entrepreneurial groups of retired judges and lawyers have formed private alternative dispute resolution firms that attempt to streamline the process and reduce administrative costs and fees. These firms are not as well known in the business community as AAA, but are well known in the legal community and can offer expertise, significantly quicker turnaround time and lower overall costs than AAA.

The fact that an existing agreement calls for disputes to be resolved either by AAA or in court does not limit the ability of the parties to later modify the dispute resolution process when a dispute arises. Parties are free to contractually agree to any form of dispute resolution that is mutually acceptable, even if the Alternative Dispute Resolution (ADR) agreement is made after the dispute arises.

The next time a dispute arises in a commercial contract that mandates AAA arbitration, you should consider asking your counsel to reach out to his or her adversary to explore whether an agreement can be reached to arbitrate or mediate a dispute in a forum or format that is potentially less expensive for all parties. Now that’s a good deal.