The Arbitration Clause

11 08 2011

Arbitration, as we explained in our last post, is a more adversarial process than mediation. In a typical arbitration, a sole arbitrator or a panel of three arbitrators listen to each party present his or her side of the case, and then make a decision, which may or may not be binding on the parties. You have probably, at some time in your life, agreed to settle a dispute through arbitration. Many, if not most, contracts with big companies (credit card companies, etc.) include an arbitration clause.

Because an arbitration clause requires your dispute to be settled outside of court, you may think it is in your best interest. After all, litigation is expensive, time consuming, and stressful, so an alternative procedure must be better for you, as a consumer or small business. However, when you sign a contract with an arbitration clause, you are giving up (or at least delaying), your right to take the other party to court, and this may put you at a disadvantage.

An arbitration clause often specifies that the arbitrators will be associated with a specific organization or industry that is likely to favor, or at least understand, the other party’s position. If you and the other party to your contract work in the same industry and would be more comfortable settling a dispute in front of experts, this may be an advantage for you. If you are not working within a specialized industry, but contracting with one who is, you may not want to settle your dispute in front of a panel of experts who may already know and respect your adversary.

An arbitration procedure is likely to be more private than a lawsuit. This may benefit both parties, or it may put one at a disadvantage by removing the incentive of bad publicity. If you are a consumer or small business entering into a contract with a big company, you might find yourself wishing you didn’t sign that contract.

An arbitration clause may also subject you to unexpected costs. For example, it could require that your arbitration take place out of state, although a lawsuit could have been filed in the state where you live and work. It may also specify an arbitration procedure with significant, up front costs. These costs will still be lower than those associated with litigation. However, some types of litigation are commonly taken on contingency, and a contingency case often costs the client little or nothing up front.