Behind Closed Doors: The Truth About Arbitration Clauses | Articles

Disputes are an inevitable part of business, but how they’re resolved can make all the difference. Arbitration is an increasingly common way to settle disagreements without going to court. Often included as a clause in contracts, arbitration offers a streamlined and private alternative to litigation—but it’s not without its drawbacks.

This article explains what arbitration is, how it appears in contracts, and the pros and cons of choosing arbitration as a dispute resolution method.

What Is Arbitration?

Arbitration is a form of alternative dispute resolution (ADR) where parties agree to resolve their conflicts outside the courtroom. Instead of a judge, an arbitrator (or panel of arbitrators) hears the case, reviews evidence, and issues a binding or non-binding decision.

Key characteristics of arbitration include:

Voluntary or Mandatory: Parties can agree to arbitrate before or after a dispute arises, but many contracts require arbitration as the primary method of resolution.
Neutral Arbitrator: A third-party arbitrator (or a panel of arbitrators) oversees the process and ensures fairness.
Private Proceedings: Unlike court cases, arbitration is confidential, protecting sensitive business information, and are typically conducted in a conference room.

How Arbitration Appears in Contracts

Arbitration clauses are commonly found in business, employment, and consumer contracts. These clauses specify that disputes arising from the agreement will be resolved through arbitration rather than litigation. A typical arbitration clause might look like this:

“Any dispute, controversy, or claim arising out of or relating to this agreement, or the breach thereof, shall be settled by arbitration administered by [arbitration organization] under its rules. The award rendered by the arbitrator shall be final and binding on the parties.”

Key elements often included in arbitration clauses:

Scope of Arbitration: Specifies which disputes are covered.
Arbitration Rules: Refers to a governing body like the American Arbitration Association (AAA), JAMS, ADR, Signature, or other arbitration organizations.
Number of Arbitrators: States whether one or more arbitrators will preside.
Venue and Governing Law: Identifies the location and laws governing the arbitration.
Binding vs. Non-Binding: States whether the arbitrator’s decision is final or subject to appeal.

Pros of Arbitration

Speed and Efficiency:
Arbitration is typically faster than litigation, with less time spent on procedural formalities like discovery and pretrial motions.
Cost-Effectiveness:
While arbitrator fees can be high, the overall costs can be lower than litigation due to streamlined procedures and shorter timelines.
Confidentiality:
Arbitration proceedings are private, which can protect trade secrets and sensitive business information from public scrutiny.
Expertise:
Arbitrators can be selected for their expertise in a specific industry or subject matter, providing more informed decisions.
Finality:
Binding arbitration eliminates the lengthy appeals process, providing resolution more quickly than traditional litigation.
No Jury:
Arbitrations do not include juries as triers of fact. Depending on the facts and the party, it can be an advantage or disadvantage.

Cons of Arbitration

Limited Appeal Rights:
Arbitration decisions are often final and binding, with very limited grounds for appeal, even if the arbitrator makes a legal or factual error.
Costs Can Add Up:
While arbitration is generally less expensive than litigation, arbitrator fees and administrative costs can still be substantial, especially for complex disputes.
Lack of Discovery:
Arbitration often involves limited discovery, which can disadvantage parties that need extensive evidence from the other side.
Potential Bias:
Concerns about “repeat player” or “frequent flyer” bias arise when arbitrators have ongoing relationships or frequent arbitrations with large corporations or arbitration organizations.
Unequal Bargaining Power:
Arbitration clauses with some unsophisticated parties (such as consumer or employment contracts) can be one-sided, forcing individuals to waive their right to a jury trial in disputes with more powerful entities.

No Jury:
Arbitrations do not include juries as triers of fact. Depending on the facts and the party, it can be an advantage or disadvantage.

Is Arbitration Right for You?

Arbitration can be a great fit for businesses and individuals looking for a faster, private, and less adversarial way to resolve disputes; however, it’s essential to weigh the benefits against the potential downsides, especially in situations where the stakes are high, or the balance of power between parties is unequal.

When entering contracts with arbitration clauses:

Read Carefully: Understand the scope, rules, and implications of the arbitration clause.
Negotiate Terms: If possible, negotiate for fair terms, such as shared arbitrator selection or a neutral venue.
Consult an Attorney: Have a legal expert review the contract and explain how arbitration might impact your rights.

Final Thoughts

Arbitration offers an efficient and private alternative to litigation, but it’s not always the best option for every situation. Understanding how arbitration works, where it appears in contracts, and its pros and cons can help you make informed decisions that protect your interests.

Whether you’re drafting contracts, entering agreements, or facing a dispute, consulting an attorney can provide valuable guidance on navigating arbitration and other dispute resolution options.

Mark Adams is a trial lawyer at JMBM who focuses his practice on business litigation including contracts, products liability, corporate and partnership disputes, and hospitality litigation. He has tried numerous cases in state courts, federal courts, and in domestic and international arbitrations. Contact Mark at MarkAdams@jmbm.com or (949) 623-7230.

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