This question is one of the big debates going on in the legal and ADR/CDR worlds.  Arbitration is essentially a private court (actually, that’s what tv shows like “People’s Court” and “Judy Judy” are).  The advantage is generally lower costs for all the parties, quicker hearings and relaxed rules of evidence.  The disadvantage is that the arbitrator’s ruling can only be appealed on very narrow grounds (fraud, conflict of interest, abject disregard for law, etc.).  Courts generally uphold the sacrosanct nature of the limited right to appeal.  So, if you don’t like the ruling of the arbitrator, you’re stuck with it.

You may not realize it, but more and more agreements you enter into contain mandatory arbitration clauses.  Credit card agreements are the big one.  Who reads those things when you sign up?  Not many people do (it’s long, boring, in small print and in legalese that the average person may have trouble understanding).  But then they get into financial trouble, default on their account payments, get scared and ignore all the arbitration notices, miss the hearing and have a default judgment against them that cannot be vacated and have little recourse afterward.  This and the converting of arbitration proceeding closer to a court trial (with higher discovery costs) are the main criticisms leveled at the arbitration process.

The U.S. Chamber for Legal Reform (an arm of the U.S. Chamber of Commerce — who represent businesses) has come out with a study showing how credit consumers are better off going through arbitration than litigation.  They compared arbitrations in California to a “random sample” of trials in New York City courts.  Their study claims that in 32% of the CA arbitrations the consumer prevailed versus 7% in NYC courts.  The arbitrations resulted in a lower default rate (47% vs. 80%) and a higher settlement rate (21% vs. 6%).

Companies like to use arbitrations because it limits their expenses on collecting on delinquent accounts.  So, in analyzing the study, consider the sponsor (and their motivations).  Also, you would be right to question if apples and oranges are being compared.

The debate will continue.