Arbitration Clause in Contracts

With growing court congestion, prolonged discovery, and motion practice driving up the cost of litigation, arbitration has become an increasingly popular form of alternative dispute resolution. Here are some pros and cons to arbitration.

An "arbitration" clause in a contract states that all disputes will be handled by arbitration rather than litigation. With growing court congestion, prolonged discovery, and motion practice driving up the cost of litigation, arbitration has become an increasingly popular form of alternative dispute resolution. Arbitration is allowing an independent arbiter to settle a dispute rather than putting it before court in a lawsuit. Absent an agreement to do so, parties are not required to submit disputes to arbitration.

Advantages of Arbitration

Arbitration can have the following advantages:

• Arbitration can be faster than litigation
• Arbitration can be cheaper than litigation
• Arbitration is less formal
• Arbitrators tend to be more sophisticated and knowledgeable than juries.

Disadvantages of Arbitration

Arbitration can have the following disadvantages:

• If you get a bad decision from the arbitrator, there usually is nothing you can do about it (no appeals as are allowed in litigation)
• You may get stuck with a bad arbitrator
• You have less chance to really investigate your case (through discovery, which is typically broader in litigation)

Discovery means the opportunity to discover information from the other side in a dispute, such as through written questions or depositions.

You should negotiate the specifics of any arbitration clause. For example, you might want to provide for three arbitrators instead of one or require that certain rules have to be followed.

If you think arbitration it is best for you, here is a sample clause:

Arbitration. Any controversy, claim or dispute arising out of or relating to this Agreement, shall be settled solely and exclusively by binding arbitration in San Francisco, California. Such arbitration shall be conducted in accordance with the then prevailing commercial arbitration rules of JAMS/Endispute ("JAMS"), with the following exceptions if in conflict: (a) one arbitrator shall be chosen by JAMS; (b) each party to the arbitration will pay its pro rata share of the expenses and fees of the arbitrator, together with other expenses of the arbitration incurred or approved by the arbitrator; and (c) arbitration may proceed in the absence of any party if written notice (pursuant to the JAMS' rules and regulations) of the proceedings has been given to such party. Each party shall bear its own attorneys fees and expenses. The parties agree to abide by all decisions and awards rendered in such proceedings. Such decisions and awards rendered by the arbitrator shall be final and conclusive. All such controversies, claims or disputes shall be settled in this manner in lieu of any action at law or equity; provided however, that nothing in this subsection shall be construed as precluding the bringing an action for injunctive relief or other equitable relief. The arbitrator shall not have the right to award punitive damages or speculative damages to either party and shall not have the power to amend this Agreement. The arbitrator shall be required to follow applicable law. IF FOR ANY REASON THIS ARBITRATION CLAUSE BECOMES NOT APPLICABLE, THEN EACH PARTY, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER MATTER INVOLVING THE PARTIES HERETO.

For more information on the advantages and disadvantage of abritration, be sure to read The Pros and Cons of Arbitration. Visit the AllBusiness.com Forms & Agreements section to see a sample Arbitration Agreement.

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