Should I Include an Arbitration Clause in My Agreement?

Whether or not to include a mandatory arbitration clause in a contract depends on your specific situation and bargaining power. Here’s a breakdown of the pros and cons to help you decide.

See more about Arbitration and Other Alternative Dispute Resolution.

What are the advantages of mandatory arbitration?

  • Faster and Cheaper: Arbitration is generally quicker and less expensive than going to court. Court cases can drag on for years and involve significant legal fees.
  • More Confidential: Arbitration proceedings are usually private, which can be desirable for businesses wanting to avoid negative publicity.
  • Simpler Process: Arbitration can be less formal than court, with fewer complex rules of procedure.

What are the disadvantages of mandatory arbitration?

  • Limited Discovery: In arbitration, there’s often less opportunity to gather evidence (discovery) compared to court. This can be a disadvantage if you need to build a strong case, or if you need to collect on a payment and want to find out what assets the debtor has.
  • Limited Appeals: Arbitration awards are typically difficult to appeal, even if you believe the arbitrator made a mistake.
  • Potential Bias: There’s a concern that arbitrators may favor businesses since businesses are repeat players in arbitration, whereas individuals are not.
  • Less incentive to resolve the dispute: A party who is concerned about bad publicity is more likely to attempt to resolve disputes outside litigation. However, since arbitration is confidential, there won’t necessarily be publicity about the proceedings, so the parties have less incentive to resolve the dispute.

Additional Considerations

  • Your Bargaining Power: If you’re in a weak bargaining position, you may not have much choice but to agree to arbitration.
  • Type of Dispute: For smaller, simpler disputes, arbitration can be a good option. However, for complex cases involving significant damages, court may be preferable.
  • Specifics of the Clause: Carefully review the details of the arbitration clause. This includes who selects the arbitrator, where the arbitration takes place, and how much information can be disclosed about the case.

Further Reading

See more about Arbitration and Other Alternative Dispute Resolution

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