Should You Sign an Arbitration Agreement?

Many business contracts you may be asked to sign include an arbitration provision. This is also true of most business contract templates you can download from the internet. These provisions are so common that most people don't think very hard about them before signing. But if a dispute arises, how you have agreed to address it is very important.

What is Arbitration?

​Arbitration is considered a form of alternative dispute resolution, because it is a way of resolving disputes outside of court. It is not mediation, however. Binding arbitration is essentially the same thing as a trial in court, just before a private judge called an arbitrator.

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Is the Arbitration Provision Enforceable?

The federal Arbitration Act both permits and encourages arbitration of disputes. Courts have interpreted this law as favoring arbitration, and will generally enforce the provisions as written.

There are some limited exceptions. In the employment context, a discrimination claim can be brought in the appropriate agency even if there is an arbitration clause. In the business context, unless there is some other flaw with the contract, you should generally expect to be held to that provision.

An arbitration decision can be entered in any court of competent jurisdiction and can be enforced like any other judgment.

Why do People Want an Arbitration Clause in a Contract?

The reason depends on the kind of contract it is. In an employment contract, employers often want this provision. This is in part because the upfront costs of arbitration discourage employee lawsuits. They also sometimes want these provisions because the overall cost to a defendant is generally lower in arbitration than in court.

In a contract for products or services, the provider often wants an arbitration provision. This is especially true when they are dealing with customers or clients in multiple jurisdictions. If they could be sued in any court having jurisdiction over any of their customers, their litigation exposure is much harder to predict. An arbitration clause ensures some uniformity for them.

Sometimes, however, people have arbitration clauses in their contracts for no other reason than that they were included in a template.

Should You Agree to Arbitration?

You may have no choice, especially if you are dealing with an employment contract or a contract presented by a large vendor.

If you do have a choice, you should consider a few things. First, like a court decision, an arbitrator's decision is final and binding on the parties. Unlike a decision by a judge, there are very limited opportunities to appeal if you are not satisfied with the outcome.

Second, pay attention to the location of the arbitration. Sometimes an agreement will simply specify the organization and rules that will apply. For example, a contract may state that any controversy or claim arising from the contract will be subject to arbitration with a specific arbitration firm. In that case, your dispute could be heard by any office of that firm, and it will be subject to whatever rules they set.

The agreement it may say that it will be subject to arbitration under the rules of the American Arbitration Association ("AAA"). That means the parties are free to select a private arbitrator from anywhere. They just have to follow the arbitration rules of the AAA.

If the agreement specifies a city or state, you should be sure you are comfortable traveling there to litigate your dispute.
Third, remember that the parties can agree to arbitration after a dispute arises even if there is no arbitration provision. If you sign one, you are bound to follow the specified arbitration rules.

Like anything else, this also depends on how much is at stake. If you are making a small purchase, the risk of an inconvenient forum is small. If the investment is larger, or if the deal is complicated enough that disputes may arise, it is worth thinking harder about the provision.

Is Arbitration Less Expensive?

Overall, arbitration is usually less expensive than litigation in court. This is because it generally moves faster than cases in court, which tends to reduce the hourly fees paid to attorneys.

That does not make it inexpensive. The parties have to pay a fee to the arbitrator, where in court the judge is paid by the state and only the plaintiff pays an initial filing fee. You also are still paying lawyers to do much of the same work they would do in court.

What is the Difference Between Arbitration and Mediation?

Both are considered forms of alternative dispute resolution, but they are very different. In mediation, a third party neutral will try to help the parties reach a voluntary settlement. If the parties do not agree, the mediation is over and they go back to litigation.

In arbitration, the third party neutral is the arbitrator and serves as a judge. He or she will make a binding decision whether the parties agree or not.

Beware of Boilerplate Arbitration Provisions

Most business contracts you can download from the internet contain some kind of alternative dispute resolution procedure. These are often incomplete, inconsistent and/or ambiguous. They are never tailored to the unique needs of your business and specifics of the agreement you are trying to document. 

The best practice is to have a business lawyer draft an agreement that is tailored to your needs in the first place. If that is not feasible for whatever reason, you should at least have a lawyer review the provisions and discuss the pros and cons with you.

How We Can Help

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!