What is arbitration and should I use it in my contracts?
Arbitration is an alternative to court, which is a public process. Arbitration involves the use of a private decision-maker selected by the parties. Increasingly, arbitrators are retired judges, but they are also lawyers experienced in the field. Two well-known organizations that provide arbitration are the AAA (the American Arbitration Association) and JAMS (Judicial Arbitration and Mediation Services). Most of the time, an arbitration clause in a contract will identify a particular organization from which an arbitrator is to be chosen.
What are the advantages?
Because arbitration is a private process, there are a few advantages. First, it is easier to keep the process and its results confidential than in a lawsuit. Second, it can be faster: the arbitrator is available in short order, whereas there are often long delays in court. Third, it can be cheaper. While there is a modest administrative fee and a significant hourly fee for the arbitrator, the time spent on the dispute with your own attorney is likely to be appreciably less than in court because of the arbitrator’s use of a simplified process of preparing for trial.
What are the challenges?
First of all, the arbitration agreement must be fair for it to be enforced. If it is not fair and you try to arbitrate a dispute, your opponent may be able to ask a court to disregard the agreement. Fairness has two component parts: substance (what is arbitrated) and procedure (how it is arbitrated). If your agreement requires disputes against you to be arbitrated but allows you to bring a lawsuit, it is unlikely to be enforced. If your agreement says that no depositions can be taken by either side, it is also unlikely to survive court scrutiny. Some courts pay attention to details such as the prominence of the arbitration clause in the contract, the font size of the language, and the length of time someone has to review the contract before signing it. There are other issues as well.
Second, there is the issue of cost. While arbitration isoften cheaper than court, some courts require the party drafting the arbitration agreement to pay all costs of the arbitration.
Third, there is the real possibility the arbitrator will “split the difference." Arbitrators, like judges, are trained to determine who is right and who is wrong, but there are two differences. First, arbitrators are often mediators, who see the best resolution as a compromise. Second, arbitrators are paid for their work privately — there is a temptation not to fully alienate the losing party.
How to evaluate if it’s right for your practice?
There are many examples of arbitration agreements out there online and in practice manuals prepared by professional organizations. One size does not fit all. Don’t make the decision without advice specific to your practice. For example, you may wish to require non-binding mediation before arbitration can take place. It adds only a modest level of expense, but it may allow the parties breathing space to resolve their dispute before positions harden. And if arbitration may end up in a “split the difference” result, it is faster, cheaper and more “patient friendly” to get there by way of mediation.
The above article is not to be taken as professional legal advice