Should You Sign an Arbitration Agreement?
Navigating Arbitration Provisions in Business Contracts
In the realm of business contracts, arbitration provisions are a common sight, and they often appear in downloadable contract templates available online. Frequently, individuals don't give these provisions much thought before signing on the dotted line. However, when a dispute inevitably arises, how you've agreed to address it becomes crucial.
Arbitration falls under the umbrella of alternative dispute resolution methods, offering a means of resolving conflicts outside the traditional courtroom setting. It's important to note that arbitration isn't synonymous with mediation. In binding arbitration, the process resembles a court trial, but it unfolds before a private judge known as an arbitrator.
Enforceability of Arbitration Provisions
The federal Arbitration Act, which encourages and permits arbitration, plays a pivotal role in determining the enforceability of arbitration clauses. Courts have consistently favored arbitration and typically uphold these provisions as they are written.
While some exceptions exist, particularly in employment contexts where discrimination claims can still be pursued through the appropriate agency, in the business arena, arbitration clauses in contracts are generally held valid. It's crucial to understand that an arbitration decision can be entered in any court of competent jurisdiction and enforced like any other legal judgment.
Why Include an Arbitration Clause?
The motivation behind including an arbitration clause varies depending on the nature of the contract. In employment agreements, employers often favor these provisions due to the upfront costs of arbitration, which can deter employee lawsuits. Additionally, arbitration can be more cost-effective for defendants than court litigation.
In contracts for products or services, providers often seek arbitration clauses, especially when dealing with customers or clients across multiple jurisdictions. Without such a clause, they could potentially face lawsuits in various jurisdictions, making litigation costs unpredictable. An arbitration provision helps establish consistency.
However, it's worth noting that some contracts may include arbitration clauses simply because they were part of a template.
Is Agreeing to Arbitration Your Only Option?
In certain situations, particularly when dealing with employment contracts or contracts presented by large vendors, you may have little choice but to agree to arbitration.
When you do have a choice, consider several factors. Arbitration decisions, like court rulings, are final and binding, offering limited opportunities for appeal compared to traditional court cases. Pay close attention to the arbitration's location, as it can significantly impact your convenience and accessibility during the dispute resolution process.
The agreement may specify a particular organization and its rules or opt for a more flexible approach, such as arbitration under the rules of the American Arbitration Association (AAA). The location and rules can greatly affect your arbitration experience.
Finally, weigh the importance of the contractual provisions against the potential inconvenience of the arbitration forum, particularly concerning the value and complexity of the contract.
Is Arbitration a Cost-Saving Alternative?
Arbitration is generally considered less expensive than traditional court litigation. The expedited nature of arbitration often reduces hourly attorney fees.
However, this doesn't mean arbitration is entirely cost-free. Parties must cover the arbitrator's fees, unlike in court cases where the judge's salary is funded by the state, and only the plaintiff pays an initial filing fee. Additionally, legal expenses associated with arbitration, including attorney fees, are still a consideration.
Arbitration vs. Mediation: Understanding the Difference
Both arbitration and mediation fall under the banner of alternative dispute resolution, yet they serve distinct purposes. In mediation, a neutral third party strives to facilitate a voluntary settlement between the parties involved. If no agreement is reached, the dispute may proceed to litigation.
Arbitration, on the other hand, features the arbitrator as the third-party neutral, serving as both judge and decision-maker. The arbitrator's ruling is binding, regardless of whether the parties agree with it.
Beware of Boilerplate Arbitration Provisions
Many business contracts available for download on the internet contain boilerplate alternative dispute resolution procedures. These clauses are often incomplete, inconsistent, or ambiguous, lacking the tailoring needed for your unique business requirements and contract specifics.
Best practices involve having a business attorney draft a customized agreement to align with your needs. If this isn't feasible, at a minimum, consult an attorney to review the provisions and discuss their advantages and drawbacks, ensuring a well-informed decision.
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We have worked with all sorts of these provisions, from reviewing and assessing a dispute resolution procedure in contracts to representing individuals and businesses in mediation and arbitration proceedings. We can help you understand what you are agreeing to and how to make the most of the arbitration rules or mediation procedures. Give us a call at (781) 784-2322 or use the button below to schedule a free consultation. We look forward to hearing from you!