Should I Have an Arbitration Clause in My Contract? Pt. 1

It has become commonplace that contracts between businesses will have arbitration clauses, meaning that the parties to the contract agree that any dispute arising out of or relating to the contract will be decided by a private party, an arbitrator, rather than a judge or a jury. 

Arbitration is an alternative to litigation that has many advantages to the parties of a contract.  Litigation is a protracted and expensive process and requires time and energy over the course of many years.  There are many unique characteristics about arbitration that contracting parties should consider when thinking about whether to include an arbitration clause in their contract.

Unlike in litigation where the Court controls the process, the parties to a contract control the arbitration process.  Parties can design the arbitration process to fit their specific needs.  Parties can control who the arbitrator is, what length of time the entire arbitration process should take, and even the scope of dispute, including what kinds of discovery, testimony and hearings there will be.  The parties themselves select the arbitrator (or panel of arbitrators) rather than having an arbitrator assigned to each case.  This way, the parties can work with each other and pick an arbitrator that both parties believe is qualified and has characteristics that the parties value, such as competence in the subject matter or dispute resolution skills.

Arbitration is a much faster means of dispute resolution than a typical litigation.  Arbitrations are designed to streamline discovery and can be completed within a year.  Litigation, by contrast, can drag on for multiple years, a problem that has only worsened since the COVID-19 pandemic because of backlog within the court systems.

One of the greatest benefits to arbitration is that arbitration is often considerably less expensive than a litigation.  Businesses will find themselves having to pay less in attorneys’ fees for an arbitration generally because the arbitration process is much shorter than a litigation.  Further, the parties can limit the discovery process in an arbitration, by deciding whether to have hearings or depositions or by deciding to limit the types of discovery. 

Another added benefit of an arbitration is that they are held in private settings and provide for confidential dispute resolution between the parties.  Litigation proceedings at a courthouse are open to the public and oftentimes there are public records of trial proceedings.  Arbitrations are usually subject to specific rules regarding the confidentiality of the proceedings.  Businesses that value their privacy and that do not want to advertise their disputes can use arbitration as a tool to keep their contractual disputes out of the public eye.   

Finally, arbitration provides comparatively more finality to a dispute that a litigation cannot provide.  Litigations are subject to lengthy appeals that can drag a litigation on for years past a court’s decision.  The Federal Arbitration Act severely limits a party’s ability to appeal a binding arbitration decision, and any appeal that is taken within the arbitration can be resolved in a timely and cost-effective manner. 

This post explores the advantages of including an arbitration clause in your business’ contract. Check back for our next installment in this series, in which we will discuss the potential disadvantages of arbitration, relative 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.