Essentially, arbitration entails an agreement between two or more parties to try to resolve a dispute outside of the court system. The parties agree upon a third party as an arbitrator who will act as a judge and jury. Usually, no set rules exist as to how arbitration is conducted; rather, it is typically left to the agreement of the parties. To facilitate the process, the parties will often agree to use the rules of an established organization like the American Arbitration Association.

 

Arbitration may be binding or non-binding. Generally, a "binding" arbitration means that the winning party can take an arbitration award to a court of law and enforce it if the losing party does not comply with the terms of the decision, whereas "non-binding" arbitration refers to a situation where the parties agree to use arbitration as a forum to try to resolve their differences, but neither party is bound to comply with any decision by the arbitrator.

 

 

Primarily, arbitration is beneficial because it serves as a forum to resolve disputes outside of the judicial system. Arbitration can be fast, quick and easy, whereas lawsuits can drag on for years and years. It naturally follows that arbitration tends to be less expensive than pursuing a lawsuit. While the parties are usually required to pay the arbitrator, his or her fees will inevitably be less than the attorneys' fees that they may have to pay to take the same case to trial.

 

Non-binding arbitration can be beneficial in that it serves to bridge the gap in an adversarial proceeding so that the parties can obtain an indication of the likely outcome of the case if they are unable to resolve their differences. Most cases settle, but many times it is not until the parties are "on the courthouse steps." Non-binding arbitration may help to facilitate a settlement sooner rather than later.

 

Moreover, an arbitrator is typically not bound by the strict rules of procedure in reaching a decision. He or she can consider more facts and circumstances than a judge or jury. Arbitrators typically try to be practical and oftentimes look at compromise as being inherently fair. Thus, an arbitrator's decision will likely award something to at least one of the parties, but damage awards are typically smaller than those awarded by juries.

 

Arbitration can also bring finality. Sometimes for the better, a decision on a binding arbitration cannot be appealed or overturned in the absence of a showing of extraordinary circumstances (for example, fraud, bias or other inappropriate actions on the part of the arbitrator). Thus, once a decision is rendered, the case is over. The losing party generally cannot appeal (which can make the matter drag on for years and years).

 

 

There are no guarantees that arbitration will be a fair process. As noted, once a decision is rendered in a binding arbitration, the parties are typically stuck with that decision. Without the right to appeal, a risk exists of being subject to the whims and prejudices of the arbitrator.

 

Identifying other detriments of arbitration will typically depend upon which side of the fence you are on. For example, if a party were concerned about a large jury verdict in the event a dispute ever arose, that party would negotiate for an arbitration clause so as to keep things out of court if a dispute happens to arise. Thus, in view of the potential for a large jury verdict on a wrongful termination case, an employer may want an arbitration clause in an employment contract. Given the potential for a large jury award on a malpractice action, a medical provider may request a patient to sign an arbitration clause.

 

Ironically, the rationale for having an arbitration clause in the first place may actually encourage parties to fight about something where a dispute otherwise could have been avoided. In the absence of an arbitration clause, the parties may be more inclined to compromise rather than pursue an expensive lawsuit. If arbitration is an option, though, the same deterrents may not exist, and the parties may simply elect to fight about something rather than try to work out their differences more informally.

 

 

 

Contracts should always be examined to determine the existence of an arbitration clause. If there is enough at stake in the contract, you should question why it makes sense to have such a clause in there. If the potential benefits outweigh the potential drawbacks, it would make sense to agree to arbitration. Otherwise, you may want to propose that it be taken out.

 

 

In a strictly business or consumer situation, arbitration may make a lot of sense. However, in individual situations, other rights may be involved that could be adversely affected in the event of a dispute. Examples would include anything having to do with an individual’s job or with professional services that might be rendered.

 

 

In theory, all contracts are negotiable. However, the practical ability to do so depends on the bargaining position of the parties. Consumers, for example, may not have much choice other than to "take it or leave it" in many contracts. In other situations, the parties may have a large say in the matter.

 

 

This is where you have to pull out your crystal ball. Try to anticipate the nature of any disputes that would arise. Would you want to resolve them quickly and easily through arbitration with the associated risks (for example, the potential for limited damages, no right to appeal, the difficulty of assessing the fairness of the process)? Or do you think that your client would be in a better position in court? 

 

 

Arbitration clauses have evolved to be rather sophisticated and complex, so they must be read with care. Sometimes the concept of arbitration may make sense but the clause itself can be too overbearing. The opposite may likewise be true. Modifications of the clause may be required.