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You may have arbitration clauses in your rep contracts and wondered what, exactly, do they mean? You may have been advised by a friend to include an arbitration clause in your contract without really understanding the consequences. Arbitration is very different from litigation which takes place in the courtroom. Which brings up the question — do I want an arbitration clause in my contracts? Like many questions, the answer is a definite maybe.

What Exactly Is Arbitration?

Arbitration is a form of Alternate Dispute Resolution (ADR) where the parties agree to have their dispute heard by an arbitrator rather than a judge or a jury. The arbitrator will hear the evidence, hear argument, and then render a binding ruling on liability and damages. Following a simple legal procedure where the arbitrator’s award is confirmed by the court, the award is made into an enforceable judgment as if the matter had been decided in a court of law.

Although parties can agree to arbitrate their dispute at any time — even while a lawsuit is pending — usually arbitration is agreed to in advance by language in the written contract between the parties, known as: the arbitration clause. Contractual arbitration clauses are almost always enforced by the court, so if your contract has an arbitration clause, and you have a contract dispute, you are probably headed to arbitration instead of court.

Why Would I Want an Arbitration Clause?

Arbitration is generally thought of as being faster and less expensive than going to court. Lawsuits can sometimes take years to resolve, while arbitrations can often be concluded in a number of months. The “discovery” period in a lawsuit (the method by which information is sought and exchanged between the parties) often takes months and thousands of dollars in legal fees. Under most arbitration rules the discovery period is greatly expedited.

Arbitrations are less formal than a court trial, and the strict civil rules for admitting evidence at court are relaxed at arbitration. This often allows for more evidence to come before the arbitrator (although the arbitrator is free to discount evidence he or she deems unreliable). Arbitrations are also not part of a public record like a civil lawsuit, which allows the parties to keep what happens at the arbitration confidential. The relative informality and potential confidentiality is generally more conducive to preserving business relationships than full-blown litigation.

The method of choosing an arbitrator is a bit different in each case, but the parties typically offer input as to who they want as their arbitrator. Arbitrators are often retired judges or experienced attorneys, but they could be laypersons as well if that is who the parties want as their arbitrator. This flexibility allows the parties to choose somebody with some background knowledge in the subject area of their dispute, which is never a bad thing.

Why Would I Not Want an Arbitration Clause?

The cost savings of arbitration over litigation is in the long-run, and the start-up fees for arbitration can be substantial. The expense of initially filing an arbitration claim is a lot more than filing a complaint in civil court — often thousands of dollars more — depending on the amount of recovery sought. The administration fees and arbitrator’s fee (times three if a panel of arbitrators is enlisted) is also paid directly by the parties, unlike the salaries of a judge and the court clerk.

Also, in lieu of a trial by jury (ideally a cross-section of the community), your matter will be decided by a sole individual (or panel of three arbitrators) who may or may not have an inherent bias for one side or the other. Understandably, there is a temptation for an arbitrator to lean toward obtaining repeat business with the ADR company, which could create a hidden bias in favor of the entity that put the arbitration clause in the contract.

Another drawback to arbitration is the waiver of a meaningful right to appeal. Once the arbitrator makes an award, it is — under normal circumstances — not subject to appeal, regardless of how illogical and unfair you may think the award is. This allows the arbitrator to apply the law creatively in an effort to render a fair result, but fairness is in the eye of the beholder, and an award can potentially be contrary to the law.

Any Other ADR Options?

Aside from arbitration and litigation, there is always the option of mediation. Mediation is where the parties appoint a third party to listen to both sides of a dispute and work with the parties to facilitate a mutual resolution. The mediator does not take sides and does not make an award. Mediation can be used at any time, regardless of what the contract says, so long as both sides agree to mediate. Some contracts specify that a mediation must take place before either party can file a lawsuit or pursue arbitration.

Conclusion

So, should you have an arbitration clause or not? That depends on the facts of your specific situation. There are pros and cons to both arbitration and litigation, and it is important that you understand the differences in order to make an educated decision. Consulting an attorney for specific guidance on this issue would be prudent. Hopefully you will never need the process of arbitration or litigation, but if you do, it will be important for you to understand what lies ahead.