Should I have an Arbitration Clause in My Contract? Pt. 2

Arbitration has, in recent decades, become the conventional means of dispute resolution in civil disputes, both between businesses and between business and consumer.  This is due to the increasing prevalence of arbitration clauses in contracts, where the parties to a contract agree to submit to binding arbitration if a dispute arises under the contract as opposed to litigating in court.

While arbitration has many special features that make it an ideal form of dispute resolution (as highlighted in our previous post), arbitration does have certain disadvantages that businesses should be aware of before signing a contract with an arbitration clause.

Arbitrations can actually cost more at the beginning of the process than a litigation.  While a litigation is long and inevitably will be expensive for both parties, it is relatively inexpensive to simply start a litigation.  It will cost the party a couple hundred dollars of court fees to file a complaint.  Whereas, in an arbitration, the parties have to pay for the arbitrator’s (or panel of arbitrators’) time.  Arbitrators are lawyers and will generally charge a lawyer’s hourly rate.  So while a litigation starts out relatively inexpensive, and becomes more costly as discovery begins or when the parties have to go to court, arbitrations can become expensive right from the start when the arbitrator gets involved. 

Another disadvantage of arbitration is the rules regarding discovery.  Arbitrations and arbitrators typically have rules and limitations on the types of discovery a party can ask for, and depositions are very rare in arbitrations.  Third-party depositions are almost always never allowed in arbitrations.  This can make it very difficult to prove certain claims that require extensive discovery or testimony from witnesses. Whereas in a litigation the parties have a much broader ability to ask for documents and to take depositions of witnesses that are not parties to the litigation but may be able to provide useful evidence.

Arbitrations generally cannot be appealed.  Arbitrators and judges (dare we say!) are capable of making mistakes.  In a litigation, there is always an option to appeal to a second court to review underlying record.  In an arbitration, the decision of the arbitrator is final.  Except for in very limited circumstances, a party does not have a right to an appeal and the parties only have one shot to win their case. 

Finally, arbitration decisions, just like litigation decisions, must be enforced.  When a party wins an arbitration, it needs to collect whatever damages it has been awarded from the losing party.  An arbitrator does not have enforcement power, and the prevailing party wants to enforce a judgment of an arbitrator, they will need to go to a court.  While a court award from a litigation can be enforced by the sheriff’s office and police, an arbitrators award requires the losing party’s good faith to pay its losses without seeking further judicial intervention.

This post explores the disadvantages of including an arbitration clause in your business’ contract.  Check with our previous installment in this series, in which we discussed the potential advantages of arbitration compared to other processes.

If you are a business that has questions about arbitration or want to consult regarding arbitration clauses in your business contracts, the attorneys at Tesser, Ryan & Rochman, LLP can help.  Call today at (212) 754-9000.