Whether dealing with a real estate contract, employment agreement, or a business contract, chances are there was an arbitration clause included in the contract. Arbitration clauses are becoming more and more commonplace in contracts. However, even though litigation and arbitration share the same goal – dispute resolution – the processes are very different.
There are many areas to consider before simply signing a contract including an arbitration clause. There may be situations where an arbitration clause benefits your business; however, there are also situations where an arbitration clause could bite you. Below are just some areas to consider when deciding if an arbitration clause is right for your business.
Although widely touted as one of the biggest benefits of arbitration, the speed of dispute resolution is impacted by many factors. One such factor is the availability of the arbitrator. Although having the dispute resolved by an expert in the field can be a benefit, there may be a limited number of such experts. Your wait time will depend on this availability. And while some courts are admittedly backlogged, the courts within your jurisdiction may be as efficient as arbitration. Another factor that can impact the speed of resolution is whether the arbitration is run through a national organization such as the American Arbitration Association (AAA) or privately between the parties. Running everything through an out of town go-between can significantly slow down the process.
Another widely perceived benefit of arbitration is the belief that it costs less. However, this again depends on the method of arbitration. There may be significant up front fees for the administration of the arbitration (especially if handled through a national association). Consider that most arbitrators are paid an hourly fee; if you have a panel of three arbitrators (as is common), plan on multiplying that factor. Finally, although discovery costs may be reduced by using arbitration, there may be significant drawbacks that come with those reduced costs (see below).
Depending on your jurisdiction, if there will be third-party discovery required, litigation may be necessary. Federal courts are split as to whether the requirement that a third-party appear or produce documents at a hearing also means a third party must produce documents for a discovery request or appear at a deposition. Additionally, arbitration may dramatically limit discovery, which is fine if there are limited number of issues and experts, but if you’re dealing with a large project with many contributors, this could drastically limit your access to information and experts.
One of the biggest drawbacks of arbitration is that essentially there is no appeal. In litigation, if the outcome of the case is unreasonable or a major legal issue was ignored, judicial review can correct the errors. However, under the Federal Arbitration Act, review is only available when: 1) the award was procured by corruption, fraud, or undue means; 2) there was evident partiality or corruption by an arbitrator; 3) or the arbitrators were guilty of misconduct that prejudices the rights of a party.
These are just a few of the issues that should be considered when signing a contract involving an arbitration clause. Be aware of the potential benefits as well as the pitfalls, and devote the necessary time and consideration before you sign the contract. An ounce of prevention is worth a pound of cure – make sure you understand what you are signing up for when you sign a document with an arbitration clause.
Parmenter O’Toole is a full-service business and real estate law firm with extensive experience in the area of construction law. The comments in this article are not intended to be a substitute for legal guidance or advice for a specific situation. You should obtain informed legal counsel to assist in your decisions relating to any issues which may be raised in this article. For additional information regarding the above topic, or any other legal issues you may have, please call 231-722-1621.