Arbitration Clauses and When You Might Need Them

Whenever you enter into an agreement with another party, you can never be too careful. A business relationship that is fruitful and friendly now could potentially and unpredictably deteriorate into a bitter and litigious one, despite your best intentions. And if you haven’t prepared for that possibility from the outset, you could be leaving yourself open to a damaging, even devastating outcome.

There are many ways you can build protections into a contract or agreement, and one of those options is by including an arbitration clause. With this action, parties generally waive their rights to a jury trial pertaining to major conflict or disagreement and agree to dispute resolution through an unbiased third-party known as an arbiter. Our Managing Partner Paul Skeith breaks down how these arbitration clauses work and when they are best utilized.

Why Choose Arbitration Clauses Over Trial?

By now, you know that an arbitration clause is an agreement between parties in a contract to not have disputes settled in front of a judge and jury in the normal court system. Instead, it is agreed that a neutral third party will privately decide the outcome of any dispute between the parties. Why would you want to do that? One reason is that an arbitration proceeding is usually much faster than a trial (although that’s not always the case.) Actions that can help make arbitration a speedier process are to be sure that the clause is drafted correctly and that it has reasonable limits, such as discovery in the arbitration process. Bench trials and even jury trials can often be just as fast as arbitration can, especially if the clause is poorly written or not clear.

Another possible benefit for choosing arbitration over trial is privacy. For example, if you file a lawsuit in a court system, all of your information and “dirty laundry” related to the dispute will be public for customers to see, competitors to see, and anyone else to see if they are interested in finding it. The only recourse you might have in maintaining your privacy via this route would be attempting to seal the court records. This can be a tedious process and a judge won’t always grant the request. In an arbitration situation, both parties can agree that the subject matter and testimony of the arbitration will remain private.

Tailor the Clause to Your Specific Needs

An additional reason that I sometimes prefer arbitration is when multiple parties are involved who reside or do business in different states or even different countries. An arbitration clause can be extremely helpful in this admittedly common situation because the clause can specify from the outset that any arbitration that might occur will take place in a particular location. That way, there are no unfair surprises for either side.

Speaking of nipping unfair surprises in the bud, many aspects of any potential arbitration proceedings can be pre-planned, unlike trials. You can set rules around how long the arbitration should take, how long the discovery should take, even what language the arbitration process will utilize. Are there other certain considerations or methods or procedures that make sense for the particular parties involved in this contract? No problem – arbitration is not one-size-fits-all. As long as both parties agree, you can construct your clause to make sure both sides are reasonably accommodated.

Research if Arbitration Works for Your Situation

Arbitration isn’t a magic wand, and it is crucial that arbitration clauses are careful to stay within the framework and language of the law, lest they lose their legally binding protections. If you go down the hallway and talk to my business litigation partners, they’ll probably tell you that arbitration is sometimes more trouble than it’s worth. There have certainly been instances where all parties wind up wishing that they were in a regular courtroom in front of a regular judge and jury.

But there are times when arbitration really works and is worth the additional upfront fees that parties pay for arbitration. If the time to a decision can be reduced and a speedier resolution made, then a quicker time to decision also means less lawyer time, lower expenditures, and – hopefully – a way to get the partnership back on solid ground.

If you need help crafting an arbitration clause agreement with a partner or other business party – or if you’re trying to determine if it’s the right course of action for you – Richards Rodriguez & Skeith’s business law attorneys may be able to assist you! Contact us today to find out how!