Should You Include an Arbitration Clause?
Some contracts include something called an Arbitration Clause. Arbitration is a way of settling disputes outside of court. They are written into contracts in order to minimize future legal disputes between individuals, businesses, real estate contracts, and employee/employer relationships. An arbitration clause can be either binding or non-binding. We’ll lay out the difference below.
When arbitration is non-binding, the arbitrator will go through the process with the two parties, collecting any relevant information, and determining which party is liable and for how much. This conclusion is merely a suggestion, and the parties do not have to comply.
Binding arbitration requires the parties to agree in their contract that they will follow the decision of the arbitrator. California allows a binding arbitration to be ignored if all parties agree.
The Advantages of Arbitration
Arbitration is often very effective in saving both time and money. It is a much cheaper option than hiring a lawyer and going to court. Legal fees quickly pile up if a dispute goes into litigation. Furthermore, litigation can take months or even years to draw a conclusion. Arbitration has more lenient rules, making pleading and collecting evidence much easier and therefore faster.
Arbitrations can also be held in confidence, without entering public records. The dispute and conclusion can remain completely private if gone through arbitration. Whereas litigation is a matter of public record and accessible by anyone.
The Disadvantages of Arbitration
When putting your arbitration into the hands of the decision-maker, you are leaving the entire ruling to a single individual. This is arguably less objective and less fair than having a jury of peers decide on the verdict. An arbitrator is only loyal to their own code of ethics, and not to the written law. While the arbitrator can ve hand-picked, there is no way to ensure that they will be impartial. It is very difficult to appeal or overturn a decision once it has been made.
There is more of an emphasis on the process of discovery when you choose arbitration, lengthening the time involved. More time means higher costs when it comes to either arbitration or trial. While going through arbitration may circumvent lawyer fees, an arbitrator needs to be paid by the parties involved and the fees can add up quickly.
There is also the possibility of the arbitration being taken less seriously than a court case. In a court, you are held to the rule of law and disputes are filtered out through the procedural processes.