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The AR Group

The Pros and Cons of a Mandatory Arbitration Clause

By Julie Morris

Businesses are increasingly favoring arbitration as a viable dispute resolution process as they have grown to view litigation as too costly and time intensive. ?The common perception is that arbitration is faster, cheaper, and puts the fate of the business in the hands of an arbitrator, rather than a panel of jurors who are possibly less sophisticated and biased.

Not surprisingly, an appetite for arbitration as a means for dispute resolution has resulted in an attempt to include binding arbitration provisions in employment?related and commercial ?agreements. ?Given this increased desire to rely on arbitration clauses, case law is evolving in such a way that a properly drafted arbitration clause can be enforceable with regard to any dispute, however remote, connected to that agreement. ?Consequently, just about anything can be arbitrated today, from employment discrimination claims (Gilmer v. Interstate/Johnson Lane Corp), to a class action contract claim (Oxford Health Plans LLC v. John Ivan Sutter, M.D) and even to a RICO claim (Pacificare Health Systems, Inc. v. Jeffrey Book).

So, what exactly is Arbitration? Arbitration is meant to be an alternative to litigation in the courts. It?s a way of?resolving a dispute without having to rely on the vagaries and time consumption otherwise normally associated with the court system.??In the court system, a judge who is paid by the government (either state or federal) oversees the litigation and either the judge or a jury decides who wins the dispute. ?A party is entitled to a hearing, either with or without a jury, evidence is presented, and a judgment is entered based on a decision reached. ?In arbitration, a private individual, who is paid by the parties, decides the outcome of the dispute. Both parties participate in a hearing that is overseen by the private party arbitrator generally selected by the parties; evidence is presented, and an award (decision) is rendered, that is usually binding.

What is an Arbitration Clause? An arbitration clause is language in a written agreement such that if a dispute arises between the parties the dispute will be resolved through arbitration. ?Often, there are terms within the clause dictating the rules of arbitration that are to be used, the location and venue, or even if a panel of arbitrators, or a single arbitrator, is required.

But, is Arbitration really the best binding dispute resolution process? The correct answer is?it depends. ?What is deemed necessary or desirable to resolve one dispute may not prove beneficial in other circumstances. ?Those considering a mandatory arbitration provision are wise to consider the following before they agree to an arbitration clause.

Advantages of Arbitration:

  • Tailored rules: Arbitration rules can be tailored to meet the needs of the parties and the types of disputes that are likely to occur under the contract. ?Accordingly, parties can agree to limit damages or even specify procedural rules for the discovery process (typically to limit the amount of discovery).
  • Expert arbitrators: A well-crafted arbitration provision will likely require that arbitrators have some knowledge or background in the underlying issue, particularly when the issues are complex or unique.
  • Expedient, convenient, less-expensive forum: Typically, an arbitration is conducted and concluded more quickly and at less cost than is associated with a court trial.
  • Confidential decisions: The parties can decide, in advance, if they want to to preserve the decision as confidential.

Disadvantages of Arbitration:

  • Not always quicker or less expensive: The informal nature of arbitration has historically resulted in an expedited and less costly resolution. ?But such informalities occasionally result in an inefficient process. ?Moreover, as of late, arbitrations have adopted some formal procedural rules, resulting in higher costs. ?There are also other costs that must be taken into account, including great variation in arbitrator fees and the cost asociated with where the arbitration is to occur?both of which the parties must bear.
  • Arbitrations can be unpredictable: Unlike judges, arbitrators are not compelled to follow the rules of evidence or the rules normally associated with civil procedure. ?In fact, decisions can be made on the grounds of what an arbitrator perceives to be fair, rather than what the law would otherwise direct. ?According to a Supreme Court ruling (Hall Street Associates, LLC v. Mattel, Inc.) a mere misstatement of law is not a basis for overturning an arbitration award.
  • Limitations of arbitrations: An arbitrator?s final decision is difficult to overturn and it is often not even possible to seek redress in a court of law. ?Furthermore, depending on state law or an agreement by the parties, other matters of law or remedy may not be applicable including specifically equitable relief and statutes of limitations.

Smart Tip: Parties to a contract must carefully evaluate whether arbitration is the preferred dispute resolutions mechanism. ?If a well-informed decision points to arbitration, one must carefully draft the arbitration provision based on, not only the relationship of the parties, but also the subject matter at issue and the types of disputes that are likely to arise.