By Claudia Pollak, Esq., Updated October 19, 2020
Whether you want a contract drafted for your business, or another party is asking you to sign a contract, arbitration clauses deserve your attention. Arbitration clauses are designed to have legal disputes resolved outside of court, through arbitration, which is a common alternate dispute resolution method.
A neutral person, called an arbitrator, hears arguments and evidence from each side and decides the outcome. Generally, arbitration is less formal than a trial, and the rules of evidence are typically relaxed. Parties can agree to binding arbitration, where the arbitrator’s decision is accepted as final with no right to appeal, or non-binding arbitration, where the parties can request a trial if they do not accept the arbitrator’s decision.
While companies often view arbitration as less expensive and less time-consuming than traditional litigation and see arbitrators as more business savvy and less likely to be biased against them than a judge or jury, there are potential downsides that should be thought through. For example, it can sometimes be easier for a claimant to proceed with a frivolous claim than if the matter was litigated in court, where a motion to dismiss must include facts sufficient to state a plausible claim. In contrast, arbitrators are sometimes disinclined to dismiss a case before discovery and a hearing.
Arbitration clauses can be modified to be more favorable to your business, so it is important when drafting a contract that you understand the language being agreed upon. It can be helpful to add details about the location of the arbitration, the scope of arbitration, including whether discovery and document exchange will be allowed, whether a panel of arbitrators should decide the case versus just one arbitrator, as well as the manner of selection of the arbitrator(s).
Sometimes there are waivers associated with arbitration clauses, such as when a party waives the right to join a class-action lawsuit. Often, costs are assigned through arbitration clauses. For example, it can be agreed that the losing party pays the cost of arbitration plus the costs of the winning party. Generally, arbitration proceedings can be kept confidential. To be fully effective, a language that allows the arbitration award to be enforced in court is important.