"Arbitration Clauses - Proceed With Caution! "

By Robert E. Lee Wright

(Approximate reading time:  < 2 minutes)

Many businesses use arbitration clauses in contracts and agreements hoping to save time and money.  While they are usually satisfied with the results, arbitrations can often take many months and cost thousands of dollars, and it is nearly impossible to overturn an unfavorable decision on appeal.  Answering the following questions will help you decide what type of dispute resolution is best for you or your business.

1.      Is it important for you to be able to appeal a bad decision?  Carefully selecting a qualified arbitrator can reduce the risks of an erroneous decision and the need for an appeal.  However, if you cannot tolerate the risk of an erroneous decision, arbitration is probably not for you because it is nearly impossible to appeal an unfavorable award.  Instead, consider first using “facilitative mediation” to resolve disputes, and then letting the courts decide any remaining issues.  This way you can appeal an unfavorable ruling to a higher court.

2.      Are you willing to let an arbitrator decide what is fair?  In both arbitrations and trials you rely on someone else, the arbitrator, judge or jury, to decide the issues in dispute.  If you want to keep control over the result, consider using mediation instead, since you can refuse to settle unless the agreement is fair to you.  Of course, since your opponent must also agree, you may not resolve your dispute, but the odds are in your favor. Nationally, over 75% of mediations end in agreement. 

3.      Is the cost of the dispute resolution process important to you?  Arbitration is usually faster and less expensive than a trial, so if you are not concerned about an appeal, it is an excellent option.  You may also consider first using a mediator to help resolve the dispute and then letting an arbitrator decide any unsettled issues.  Because most mediations are concluded in a single day, it usually entails a fairly nominal investment and may save you thousands of dollars later, since any issues resolved in mediation will not require further legal services to present them in arbitration (or trial). 

Before signing an agreement that provides for alternative forms of dispute resolution, be sure to review it carefully with the following in mind:

        If privacy and confidentiality are important to you, make sure the agreement provides for it.  If you choose arbitration, make sure that your agreement to arbitrate provides that the record and the award will remain confidential and that the arbitrator may not be called to testify.  Likewise, if you decide to use mediation, alone or in tandem with arbitration, be sure the agreement to mediate states that the process is private and that any agreements will be kept confidential.  (Unlike arbitration, most courts have rules like Michigan’s that prevent a mediator from ever being called as a witness and keep everyone from testifying about matters disclosed in the mediation.)

        An alternative dispute resolution clause may not keep you out of court.  Earlier this year the U.S. Supreme Court ruled that a valid arbitration clause in an employment agreement could not prevent the EEOC from pursuing employment discrimination claims against an employer, even though it would have prevented the employee from pursuing those same claims in court.  While the rationale of this case would seem to apply to any form of dispute resolution mandated by an agreement between private parties, it is unclear whether courts will extend it to mediation.

        Totally one-sided agreements will probably not be enforced.  For instance, an Alabama court recently ruled that an arbitration clause giving one party the sole right to pick the arbitrator was “unconscionable” and voided the arbitration agreement, allowing the case to proceed to trial instead of arbitration.

        Choosing an organization that charges fees based on the amount in dispute to conduct the arbitration can be expensive.  A less costly alternative is to mutually agree on an arbitrator and either adopt published rules or simply let the arbitrator select the rules for the arbitration.

        Using multiple arbitrators may provide a better result than relying on a single arbitrator.  Under the theory that two heads are better than one and are less likely to be misled, a panel of three arbitrators may help to ensure a better result. 

        How may we help?  Discussing your options before agreeing to arbitration could save you thousands of dollars down the road.  If you would like assistance with provisions for arbitration, mediation or other dispute resolution options, please contact us.  We can also help you select a qualified arbitrator or mediator.

For assistance, simply click on the following link (or put it in your address book and send us a message):  Bob@thepeacetalks.com.

We hope you find this information useful.  Either way, we value your feedback.  Please let us know what you think by sending us a message. 

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05/10/02