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Making an Informative Decision: Pros and Cons of Having an Arbitration Clause in a Contract

The decision to have an arbitration clause in a contract could be very beneficial. However, it is not a decision that has a clear cut answer in every type of situation. To find out if arbitration is for you, it is often recommended that you speak to an attorney familiar with the arbitration process in order to advise you accordingly. Cordero Law LLC is very familiar with the arbitration process and would be happy to further advise you in this matter. 

So… What is Arbitration?

Arbitration is a popular mechanism often used in place of litigation. When a dispute occurs between respective parties that decide to handle their disputes in an arbitration proceeding, instead of bringing the dispute to a courtroom, it is brought before an arbitrator whom will solely hand down a resolution to that particular dispute.

Arbitration should not be confused with mediation.  While the two are similar in some aspects, both being considered methods of alternative dispute resolution – such that both parties foregoing the option of litigation, the processes are very much different. With mediation, a settlement is made between both parties coming to a mutual resolution. The role of the mediator is to facilitate such settlement between the parties, instead of making the final decision – such as what the arbitrator would do.

Arbitration Clause - Want to agree to have an arbitration before problems arise?

When parties enter into a contract between each other, they will often agree to resolve all future disputes relating to the contract through arbitration upon the signing of the contract. This is known as an arbitration clause. In today’s contract world, the arbitration clause has become a standard provision (also known as “boilerplate term”) that is often placed into many commercial contracts. Having an arbitration clause allows the parties to a contract to set their terms before a dispute occurs. Common examples of what can be agreed to on an arbitration clause are: 1) determining whether the arbitration will be binding on the parties; 2) deciding the number of arbitrators that will be involved with the arbitration in addition to deciding how the arbitrator(s) will be chosen; and 3) choosing the location as to where the arbitration will take place.   

Should you have an arbitration clause?

There are many pros and cons of having an arbitration clause in a contract and both should be looked at carefully to ensure you are behaving in your best interests.

The Pros of Arbitration

  • Money saved. The cost of arbitration varies and is dependent on what the arbitrator is currently charging and whether or not they hire an attorney to consult. Even with costs on the rise for arbitration due to more companies opting in that direction, it may still be cheaper than litigation and court costs.
  • Less hassle, less time-consuming. Most arbitration proceedings can be scheduled at your convenience. Court calendars are often tied up, taking as long as 18 months to 3 years before your case can be presented and doesn't always work around schedules of the disputing parties.
  • Less animosity. Having to deal with a dispute is already stressful enough and the frustration of dealing with busy court schedules and time constraints may aggravate the situation further. When going through arbitration, all parties are encouraged to participate in the proceedings and voice their issues in a more constructive and less hostile environment.
  • Privacy. The process and conclusion of arbitration are kept private in most cases and excluded from the public record.

The Cons of Arbitration

  • The cost for arbitration is on the rise. Inflation costs aside; as more companies opt to add the arbitration clause to their contracts, arbitrators are increasing the prices for their services and while the cost may still be less than litigation, this may not be the case in the future. “According to a recent survey by Public Citizen, a consumer watchdog group,” as stated in the legal encyclopedia Nolo, “the cost of initiating an arbitration is significantly higher than the cost of filing a lawsuit: $6,650 to $11,625 to initiate a claim to arbitrate a consumer claim worth $80,000 versus $221.” There are also additional fees to take into consideration. 
  • The question of objectivity. Like a lot of retail businesses, some arbitration groups market their business by adding incentives such as whether or not the client will be using a credit card. The uncertainty the proceedings will be neutral or whether or not the arbitrator is biased toward the selective party may also cause some issues.
  • Unsatisfied resolutions. Depending on the arbitration clause selected, mandatory vs voluntary; binding vs non-binding, the resolution has the potential of making one disputing party feeling as though they were left with little to no resources and while most individuals would seek to have their information concerning such issues kept private, that will also prevent the case from being heard through litigation court proceedings.

Conclusion

Deciding whether arbitration is right for you can be a difficult and complicated decision. While arbitration may be appropriate in some cases, it may not be the best decision in others. The decision to arbitrate should not be a “one size fits all” type of decision. To find out if arbitration is for you, it is often recommended that you speak to an attorney familiar with the arbitration process in order to advise you accordingly. If you have any questions about arbitration, feel free to contact us today.

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Julian Cordero is an Attorney, Music Producer, and Entrepreneur.  Oh and he blogs too!  Julian is licensed to practice law in New York and is the Managing Member of Cordero Law LLC, a New York City based law firm focusing on Business Law, Entertainment Law, and Intellectual Property.