The Secret to Efficient and Cost-Effective Dispute Resolution for Small Businesses

By Bridget McCormack and Svetlana Gitman, drafted with the assistance of ChatGPT, originally published in SBAM’s July/August 2023 issue of Focus magazine

For small business owners, commercial¹ disputes are not just a headache but can also have significant financial consequences. One way to resolve commercial conflicts without resorting to litigation is arbitration. This alternative dispute resolution method has gained traction among small business owners due to its efficiency, cost-effectiveness and flexibility.

In short, arbitration is when parties agree (usually by contract) to submit a dispute to one or more impartial persons for a final and binding decision. This article will explain the benefits of arbitration, and how small businesses can use this process to make sure that commercial disputes don’t disrupt their businesses.

Time Efficiency

In a world where time is money, small businesses cannot afford to be tied up in lengthy court battles distracting them from their day-to-day operations. Arbitration offers a significantly faster resolution of disputes. How fast? Based on 2022 statistics from United States Federal Courts, the median time from filing of a lawsuit to trial was 33.2 months.

Data collected by the American Arbitration Association-International Centre for Dispute Resolution (AAA-ICDR),² a 501(c)(3) non-profit organization and the largest provider of dispute resolution ser- vices in the world, shows that the 2022 median time from filing to award was only 13.2 months.³ In other words, on average arbitration is 20 months (almost two years) faster!

In Michigan specifically, the median time from filing to trial in the Eastern District of Michigan⁴ in 2022 was 40.2 months. Compare that to 14.4 months, the median time from filing to award for Michigan cases in 2022 at the AAA-ICDR – a difference of more than two years. State courts generally take even longer, in large part because their case- loads are significantly larger than federal courts’ caseloads and the pandemic therefore created hefty backlogs in many jurisdictions – arbitration can take years off the life of a dispute when compared to state court litigation.

Arbitration is faster because the process is streamlined, decisions are final, and arbitrators are experts in the particular area of the dispute and aren’t managing thousands of cases at once as courts do. The swiftness of arbitration allows small businesses to refocus on their core operations sooner, minimizing the adverse effects of any dispute.

Cost–Effectiveness

Legal fees and court costs can escalate quickly, putting significant financial strain on small businesses. Moreover, disruptions in business can be extremely costly. Arbitration is generally significantly less expensive than litigation because of the simplified process. And arbitration hearings are less formal than court procedures, which can further reduce the overall cost.

Confidentiality

For businesses, reputation is everything. A public dispute can harm a company’s image, deterring potential customers or partners. Arbitration offers a confidential process, where parties can resolve their issues privately. Unlike court cases, arbitration proceedings are not part of the public record, and the details can remain confidential. This discretion allows small businesses to protect their reputation and maintain strong relationships with stakeholders.

Flexibility

Arbitration offers flexibility in the dispute resolution process that traditional litigation cannot match. The parties involved can choose their arbitrator, location, rules governing the proceedings and have control over the schedule. This autonomy allows small businesses to tailor the process to their specific needs and preferences, ensuring a fair and efficient resolution in a timeline that works for the changing business needs.

Control in Selecting the Decision-Maker

In litigation, parties have no say in the judge assigned to their case. Arbitration allows parties to mutually select their arbitrator, typically an expert in the relevant industry or field. This control ensures that the decision-maker has the necessary knowledge and experience to understand the intricacies of the dispute, which can lead to a more informed and appropriate resolution. Parties also can agree, in their arbitration agreement or in the arbitration, whether one or three arbitrators will decide their case, which allows the parties to better control the cost of the arbitration.

Enforceability of Awards

Awards issued by arbitrators are generally easily enforced under the Federal Arbitration Act and state equivalents. Additionally, the New York Convention, a treaty signed by over 160 countries, ensures the recognition and enforcement of international arbitral awards in those countries that are signatories to the Convention. This provides a significant advantage for small businesses involved in cross-border disputes, as it guarantees that a resolution reached through arbitration will be respected worldwide.

Finality

Unlike court judgments, which can be appealed at multiple levels, arbitral awards are typically final and binding. This finality prevents lengthy and costly appeals, allowing small businesses to put disputes behind them and move forward. Although limited grounds for challenging an arbitral award exist, such as fraud or bias, the bar for vacating an arbitral award is quite high, and courts are hesitant to disturb arbitral awards, even when they do not agree with the final outcome.

However, for those who are nervous of the prospect of no appeal, the AAA-ICDR has developed Optional Appellate Arbitration Rules that small businesses can include in their arbitration clause when drafting their contract. These rules will provide for an expedited appellate procedure that is completed in just two to three months, rather than years of appellate litigation.

Conclusion

Arbitration is an increasingly attractive option for small businesses seeking to resolve commercial disputes efficiently and cost-effectively. By embracing this alternative dispute resolution method, small businesses can protect their interests and reputation, conserve resources and maintain their focus on growth and success.

Helpful guides for learning more about AAA-ICDR arbitration services for small businesses can be found at: www.adr.org/adr-resources. Assistance with drafting an arbitration clause can be found at www.ClauseBuilder.org.

For more information please contact Svetlana Gitman Vice President, AAA Commercial Division, at gitmans@adr.org.

¹ This article addresses only commercial, business-to-business disputes, as there are other considerations at play for consumer or employee disputes for small business owners.

² The AAA–ICDR is headquartered in New York, New York, with 26 offices around the U.S. and an Asia Case Management Centre in Singapore. The AAA-ICDR has helped resolve over 7.5 million cases since 1926.

³ 2022 AAA-ICDR data is composed of all cases awarded with a claim or counterclaim in excess of $75,000.

⁴ Statistics are not computed for federal districts with less than 10 reported cases going to trial. For this reason, statistics for the Western District of Michigan were not computed.