Arbitration is an increasingly popular mode of alternative dispute resolution because it is potentially faster, more streamlined and less expensive than litigation and court proceedings. While two parties can agree to enter arbitration at any time during a dispute, it's quite common to have a clause in a contract stipulating that arbitration will be the only mode of dispute resolution, meaning that in the event of any conflict between the two parties litigation will not be an option. The question then becomes, should you initial that arbitration clause? What do you lose or gain by doing so?
Arbitration Pros and Cons
Consider the probable advantages and disadvantages of arbitration. Arbitration can be much less expensive than litigation because there is much less legal wrangling and it is a less formal proceeding, with both parties agreeing on a professional arbitrator and presenting their case, sometimes over the course of several meetings or sometimes in one day. In addition, arbitration can be much less adversarial than litigation. When arbitration works well, it can be a positive experience where everyone walks away satisfied.
However, there are potential disadvantages to arbitration. Agreeing in advance to settle disputes via arbitration removes the option of court proceedings, so if arbitration does not go your way you will be stuck with an outcome you may not be happy with. Also, while arbitration can be generally less expensive, the arbitrator hired for the process must be paid, usually an hourly fee. If proceedings drag on, this can actually turn out to be more expensive than a lawsuit.
Arbitration Clause: Considerations
If you're not opposed to arbitration in general as a dispute resolution mechanism, there are some things to consider about the language in the actual clause you're initialling:
Are All Involved Parties In Agreement?
In a simple contract, there are two parties involved. However, sometimes there are more. In a Real Estate contract, for example, there is the buyer, seller and their brokers. Has everyone involved initialled the arbitration agreement? If not, you could find yourself in a situation where you are forced to arbitrate with one party and litigate against another.
Is There a Fee Award Clause?
If you agree to arbitration, is there language about attorney's fees or other costs being awarded the loser? You may not object to this, but you should know what you're agreeing to ahead of time.
Do You Have Right of Discovery?
In the courtroom, you would automatically have the right to 'discover' all the pertinent information about the case. This is not automatically true in arbitration. If you suspect your opponent will have more information or access to information than you, make sure this right is included.
Ultimately, every situation is singular and you will need to decide on a case-by-case basis whether arbitration is an acceptable solution. Just remember that no dispute resolution technique is one-size-fits-all.
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