Arbitration clauses are used in contracts to avoid litigation between businesses. It is an efficient way of dealing with problems, and to keep disputes confidential.
Arbitration, a type of alternative dispute resolution (ADR) is a popular alternative to litigation used to solve conflict between parties. It is a private process, highly effective and efficient and less formal than going to court because it is not subject to court rules.
How does arbitration work?
The parties submit their dispute to an arbitrator who evaluates their arguments and evidence, after which they decide. A party cannot appeal an arbitrator’s decision. Arbitrators’ decisions, or awards, are binding and final.
Pros and cons
Like anything, there are pros and cons to the use of arbitration clauses. However, they remain a popular form of dispute resolution in business contracts.
Things to consider before adding an arbitration clause to your contracts:
- If your business decides to go to court, are you willing to lose everything if the other party wins?
- Could going to court, which is a public process, put your intellectual property or other confidential information at risk?
- What does your attorney think about adding an arbitration clause in this specific contract? Every contract is different, and your attorney may advise you to include it in one and exclude it from another.
These are all critical questions for you to think about when making the decision to include an arbitration clause in your contracts. The confidentiality and lack of formalities involved in arbitration make it worth considering. However, arbitration can incur higher costs because you will pay not only your attorney’s fees but the arbitrator’s fees as well.
The decision of whether to include an arbitration clause in a specific contract with a business should be something you consider thoroughly.