As a business owner, you want to protect your business, your assets, and yourself from litigation. However, sometimes legal disputes between parties are inevitable. So, will you end up in court or in arbitration? What are the considerations?
This blog post explores the pros and cons of including an arbitration provision in a contract.
Arbitration – definition
The submission of a dispute to an unbiased third person designated by the parties to the controversy, who agree in advance to comply with the award—a decision to be issued after a hearing at which both parties have an opportunity to be heard.
Is your arbitration clause there for the right reasons?
Buried somewhere towards the end of the boilerplate in many contracts is a provision for arbitration to resolve disputes instead of litigating a dispute in court. Clients often ask who the provision benefits, but a better question is: why arbitration? If either party requests the provision, ask yourself the following questions:
- Is it enforceable?
- How is it enforced?
- What practical effect will it have on the resolution of any given dispute?
Arbitration can offer a faster, more discrete, and more customized dispute resolution process, but it all comes at a cost.
How much will you pay for time?
While the courts are often slow (and we have yet to see how deep of a hole COVID has put the system in), those delays do not necessarily add costs or attorney’s fees to clients. In fact, delays can allow parties to spread costs across the year (or more) it takes to resolve a case in court.
On the other hand, resolving a dispute through arbitration in just a few months pushes all the costs into a compressed period, and discovery costs typically remain involved in commercial disputes even when they are litigated.
Determining which cost structure is better for your business and whether it makes sense to pay more for a fast resolution is important when deciding whether an arbitration provision is the best choice for your business.
How much will you pay for privacy?
Arbitration also typically takes matters out of the public record, with significant strategic consequences. Unlike a judicial proceeding, the filings and all the allegations they contain are not public. An arbitrator has broad authority to issue protective orders for the subject of the arbitration. Any resolution to an arbitrated dispute may also be sealed from the public both as to the identity of the prevailing party and the dollar value of any decision. Particularly for consumer-facing businesses and employment disputes, it can be especially beneficial to businesses to avoid the public airing of outrageous or salacious claims or widespread knowledge of an award of significant damages.
How much will you pay for predictability and finality?
At the arbitration hearing, delivering fair, predictable, and consistent outcomes takes a different path than at the courthouse. By entering arbitration, parties waive various statutory protections and follow a process almost entirely determined by their contract and the rules of the governing arbitration forum. Among the rights the parties waive include:
- the right to a jury trial,
- the right to appeal certain rulings,
- the right to join parties not bound by the contract,
- the right to discovery under the rules of civil procedure,
- and the protections of the state or federal rules of evidence.
The extent to which these rights are waived varies by the forum chosen for arbitration. The venue and rules may be designated by the contract or, if silent, default to state or federal arbitration law. Under any system, the final judgments return to court for enforcement, as do any disputes about the process, but typically not the outcome.
Costs: How much will you pay? (and is it worth it?)
It is often assumed by litigants, legislators, and courts themselves that arbitration offers a faster and cheaper way to resolve disputes. However, while arbitration can be faster, it is rarely cheaper in the commercial litigation context.
Taxes fund courts; every citizen and business who pays any tax is chipping in for the costs of the courthouses, judges, clerks, bailiffs, and technology that goes into running the system. When parties opt-out via arbitration, they have essentially decided to pay for a parallel system. They pay administrative fees, and then they pay for one or three arbitrators, who are paid by the hour at rates similar to those of the attorneys.
Unlike a judge’s salary, those fees are paid by the parties, either by a party designated in the agreement, by a 50/50 split, or by the losing party. Additionally, courts have found that forcing an “unsophisticated” party, like an ordinary consumer, to bear significant arbitration costs will make an arbitration clause unenforceable, so consumer arbitration agreements can require the business writing the contract to pay the costs.
Conclusion
As with most negotiated contractual rights and obligations, business owners should be intentional in their decision to seek arbitration. Whether or not arbitration is right for your business depends on the financial, privacy, and time value needs of your organization. Carefully consider how an arbitration provision would impact your business from both a long-term and short-term perspective before assuming it is the right choice.
Gordon Wikle is an attorney at Venn Law Group with more than 14 years of experience serving as an assistant district attorney with the State of North Carolina. He focuses on commercial litigation and enjoys analyzing problems and finding creative solutions that are in the best interest of his clients. Navigating difficult situations and resolving business disputes are areas where he excels. Gordon earned his J.D. from Duke University School of Law and has his B.A. in Economics from Vanderbilt University.
