Arbitration is a form of alternative dispute resolution (ADR), which has gained wide-acceptance in the business world as a means of resolving disputes. Is this method right for your business and should it be addressed in your contracts?
The purpose of the clause is to prevent the disputing parties from filing claims in the civil courts with the goal of saving time and expense by going through the ADR process. However, if the agreement is silent on ADR, a party cannot be forced into arbitration.
Who arbitrates these cases? For starters, the American Arbitration Association is perhaps the best known organization providing this service. However, there are several others available and which may be identified in the contract.
Does arbitration save money? This depends upon the circumstances of the dispute, but the process can still be expensive, as both the ADR provider and the arbitrator(s) charge for the service. Generally, arbitration is less expensive than traditional civil litigation, as the arbitration rules are geared toward limiting the pre-hearing discovery and applications. Further, arbitration is generally more flexible, whereby the parties have greater control over the pace of the matter and the hearing dates.
What should you insist upon in an arbitration clause? First, negotiate for the most favorable state law and ADR jurisdiction. For most businesses, having the ADR geographically close by is less expensive and gives you the ability to have your preferred law firm handle the matter (example, insert "Hunterdon County" or "Northeast Case Management Center" if the AAA is to be providing the ADR service). Often, the site of the arbitration hearing and the application of your state law to the issues will give you leverage when it comes to negotiating a settlement, and may mean the difference in persuading the arbitrator to your position.
Second, for cost effectiveness, consider restricting the arbitrator to an up or down decision. This means they are authorized to state only who wins and who loses without going into any detail. Although this saves time and money, this option can be perilous if the case has complex issues requiring relief other than just monetary. The other option is a “reasoned decision;” whereby, the arbitrator gives their reasons for the decision. By permitting the arbitrator this authority, you lose some of the control over cost, but you may prefer to know the basis for the decision.
Third, restrict the ability to appeal decisions and request that attorney fees and arbitration costs be awarded to the “prevailing party.” These terms will maximize the ability to settle the case before it proceeds to an arbitration hearing.
Of course, this article is not intended to be relied upon as advice for your particular circumstance. Therefore, consult with a qualified business attorney about ADR clauses before signing the contract.
© Kilcommons, Shanahan, LLC 2012