So, You Think You Want to Arbitrate?
Contract Disputes, Arbitration, and Arbitration Clauses
While arbitration clauses are often a good idea, sometimes an arbitration clause can work against recovery on the contract. Before including an arbitration clause in a contract, think about who will most likely be a plaintiff, who will most likely be a defendant and the amount of damages.
Arbitration vs. Mediation
Arbitration should not be confused with mediation. When a contract contains a mediatiation cause, the parties are typically agreeing to informally discuss settlement with a neutral third party before actually filing a lawsuit. The decision of the mediator is not binding. When contracting parties agree to arbitrate, they are agreeing to let this neutral third party actually decide who is right and who is wrong. The decision of the arbitrator is binding.
Arbitration: Not Always the Best Solution
Arbitration is not always quicker and less expensive than going to court. This is especially true when the amount in dispute is small – say just a few thousand dollars. For a dispute of just a few thousand dollars, small claims court may be quicker and less expensive because the rules of procedure are relaxed in small claims court.
Other issues to consider are which party is more likely to file a lawsuit, how much will be in dispute and whether formal gathering of evidence will be necessary to the case. The process of gathering and producing evidence is called discovery. Often, this ability to discover evidence is greatly reduced in arbitration. If one party needs information from the other party, an arbitration clause may not allow for access to that information.
Understanding How Arbitration Works
If the contracting parties agree to arbitrate, they should include details about the arbitration process. If using a formally recognized arbitration group, that group typically has published rules of arbitration. These rules should be reviewed. Particular attention should be paid to the number of arbitrators, where the arbitration will be held, who pays the arbitrator fees, limitations on the use of legal counsel and how many arbitrators will make up the arbitration panel. All these factors will impact the cost of the arbitration.
An Arbitration clause can be an important part of any contract. Be sure you understand how arbitration works before agreeing to include this clause in a contract.
