Arbitration vs. Court: What Is the Difference for a Business Dispute?

The differences at a glance

Arbitration exists only because the parties agreed to it. The Federal Arbitration Act, 9 U.S.C. § 2, and the Texas Arbitration Act, Tex. Civ. Prac. & Rem. Code § 171.001, both make a written agreement to arbitrate valid and enforceable, and a court will send a dispute to arbitration when such a clause covers it. Without a clause, the dispute goes to court. With one, the following things change.

Who decides the case

In court, a Dallas County district judge rules on the law and, unless both sides waive it, a jury decides disputed facts. You do not choose the judge. In arbitration, the parties choose the decision-maker. Under the AAA Commercial Arbitration Rules the provider sends each side an identical list of candidates, each side strikes and ranks names, and the provider appoints from what both lists have in common. If the contract names a method that fails, Tex. Civ. Prac. & Rem. Code § 171.041 lets a court appoint the arbitrator.

That choice cuts both ways. A retired judge or a construction lawyer who has seen a hundred change-order fights may read your documents faster than a jury would. The same arbitrator will not be moved by a story that would persuade twelve Dallas residents. There is no jury in arbitration.

Which law governs: the FAA or the Texas Arbitration Act

Both can apply to the same contract. The FAA reaches any written arbitration clause in a contract involving interstate commerce, which covers most business contracts with an out-of-state party, supplier or customer, and it applies in Texas state courts as well as federal courts. The Texas Arbitration Act governs agreements the FAA does not reach and fills gaps where the FAA is silent. Section 171.002 carves some agreements out of the Texas act, including a personal-injury claim and certain consumer-sized transactions by an individual unless the agreement is signed by each party and each party's attorney. Whether a given clause holds up is its own question; see whether an arbitration clause is enforceable in Texas.

Public courtroom or private hearing

A lawsuit is public. The petition, the exhibits attached to motions, the hearing transcripts and the judgment are available to competitors, customers, lenders and reporters unless a court seals them, which is rare. Arbitration is private by rule. AAA Rule R-26 requires the arbitrator and the AAA to maintain the privacy of the hearings, and Rule R-45 requires them to keep confidential all matters relating to the arbitration or the award unless law, a court order or the parties' agreement says otherwise.

Privacy is not absolute. The rules bind the provider and the arbitrator, not the parties, unless the contract adds a confidentiality term. And when the winner asks a court to confirm the award, the award is filed in a public court record.

How much discovery you get

In Texas court, Rule 190 of the Texas Rules of Civil Procedure sets discovery levels, and a party can take depositions, serve interrogatories and requests for production, and subpoena third parties largely as of right. In arbitration, discovery is what the arbitrator permits. AAA Rule R-23 gives the arbitrator authority to manage the exchange of information with a view to an efficient and economical resolution, which usually means exchanging documents each side relies on and responding to reasonable document requests. Depositions are the exception, not the rule. The Texas Arbitration Act lets arbitrators authorize depositions and issue subpoenas for witnesses and records (§§ 171.050 and 171.051), so the tools exist, but you have to ask and justify them.

This is the difference that most often decides which forum favors you. The party that needs the other side's internal emails, bank records or accounting to prove its case usually does better in court. The party whose case is already in its own files usually does better in arbitration. A fuller comparison is in what discovery you get in arbitration.

How final the result is

A trial court judgment can be appealed to one of the Texas courts of appeals, which will reverse legal error. An arbitration award cannot be appealed for legal or factual error at all. Under 9 U.S.C. § 10 a federal court may vacate an award only for corruption, fraud, evident partiality, misconduct such as refusing to hear material evidence, or arbitrators exceeding their powers. Tex. Civ. Prac. & Rem. Code § 171.088 lists the equivalent Texas grounds. A wrong answer that is honestly reached stands. The narrow routes that do exist are explained in whether an arbitration award can be appealed or vacated.

How the winner collects

A court judgment is enforceable the day it is signed, subject to post-judgment motions and appeal. An arbitration award is a private decision with no sheriff behind it. The winner files an application in court to confirm the award; once confirmed, the court enters a judgment that is enforced like any other (Tex. Civ. Prac. & Rem. Code § 171.092). That step is usually quick and usually unopposed, but it is a step, and the loser may use it to raise the vacatur grounds above.

Time and money

Arbitration is often, not always, faster, because there is no crowded docket to wait behind and no appeal to wait through. It is not automatically cheaper. In court the judge is paid by the county and the filing fee is fixed by statute; in arbitration the parties pay the provider's administrative fee and the arbitrator's hourly compensation, and a three-arbitrator panel triples that line. What arbitration saves in discovery it can give back in fees. The drivers are set out in whether arbitration really costs less than litigation.

Example

Suppose a Dallas distributor signs a supply agreement with a manufacturer in another state. The agreement has an AAA arbitration clause. Shipments arrive late and defective, and the distributor loses its largest customer. In court, the distributor could depose the manufacturer's plant manager and subpoena its quality logs; in arbitration, it will have to persuade the arbitrator that those logs are material enough to order produced. In court, the manufacturer's defective-product history becomes public record; in arbitration it stays in the hearing room. Neither forum is better in the abstract. The question is which side needs the discovery and which side needs the privacy.

What to check in your contract now

• Whether the clause covers every dispute ("arising out of or relating to") or only some, and whether it carves out injunctive relief or collections.
• Which provider and rules it names, how many arbitrators, and where the hearing sits.
• Whether it says anything about discovery, a reasoned award, or confidentiality of the parties themselves.
• Whether it has been waived by conduct, if a lawsuit is already under way.

Tina Wysk represents Texas businesses in state and federal court and before AAA and other arbitration panels, and advises on which forum a given dispute belongs in. The business arbitration and mediation practice page describes that work.