Arbitration: Is It Your Best Contract Choice?

When you are signing or drafting a contract, one of the decisions that you may face is whether to include an Arbitration Clause into the contract. Often, most business and commercial parties will insert a simple Arbitration Clause into a contract, but they usually do so without truly analyzing whether having an Arbitration Clause is best. When an Arbitration Clause is in a contract, you are limiting your relief if something goes wrong in other words, you can no longer seek contractual relief in the state or federal court systems.

Despite the common lore that arbitration is the cheapest and best way for a business to resolve a dispute, solving a dispute in court (as opposed to in arbitration) is often the most cost-effective choice. So it is very important to carefully consider the nature of your contact and how any problems could be resolved efficiently or with the least expense.

If you decide you truly want arbitration, it can be very effective. A carefully crafted provision can prevent hassle and expense, and even provide you with a significant advantage. However, the following issues should be considered when considering whether or not to insert an Arbitration Clause into a contract:

• Arbitration bodies (such as the American Arbitration Association) often charge many thousands of dollars just to initiate an arbitration. Alternatively, the costs to initiate a lawsuit are typically less than $100 in filing fees.
• Because of these expensive arbitration upfront costs, once an arbitration has been initiated, the matter is less likely to settle than a lawsuit in court.
• However, if your business defends a lot of lawsuits, having an Arbitration Clause could be beneficial because (a) the arbitration schedules can be tailored to your needs and (b) the expensive upfront costs could act as a barrier for individuals or companies to initiate a suit/claim against your company.
• If an Arbitration Clause does not specifically permit class action suits, then the potential claimant will likely not be able to be a part of any class action, whether in arbitration or court system.
• The expense of arbitration continues to grow after initiation because the parties pay hourly for the arbitrators time. Alternatively, the parties to a contract dispute do not pay for the judges time in court.
• Arbitration decisions are typically final. Unlike in the court system, arbitration decisions are rarely appealable.
• Because of this final nature of arbitration, arbitrators are not strictly bound by evidence or procedural rules. You should presume that the arbitrator will become a dictator where rules of law may not be strictly followed. Thus, if you want to ensure that strict evidentiary or procedural rules are followed, you need to be in the court system.

Arbitration Clauses should never be assumed. The choice of arbitration should be only included with caution. When we are negotiating and finalizing a contract, Longman & Van Grack will always initiate a discussion regarding arbitration so you can understand the implications and make an informed decision about the best strategy for your interests.

Longman & Van Grack regularly assists companies with different types of Business Law issues such as contract review, contract drafting, and Contract Disputes.Longman & Van Grackattorney Adam Van Grack has represented many individuals and companies in contract matters. Call us at (301) 291-5027 if you have any further questions or if you think we can help you out.