Today, many contracts contain arbitration clauses, which often state that in the event of any dispute arising from the contract, the parties will be required to resolve the dispute through binding arbitration — instead of in a court of law.
Before agreeing to arbitration, it is important that you understand the consequences of signing a contract which requires binding arbitration and deprives you of the right of recourse to your local courts for any dispute.
While all litigation can be costly, commercial arbitration can be considerably more costly than using the court system because of the arbitration filing fees, administrative fees and requirement that the participants pay for the arbitrators’ services. Where a three arbitrator panel is selected, the costs can be tripled. In contrast, initial access to the courts only requires the payment of filing fees and cost of service of the summons and complaint. Both types of proceedings require depositions to record witnesses’ sworn testimony.
An arbitration clause may provide that the arbitration shall be governed by the laws of another state and conducted in a far off location. These aspects of arbitration can add to the expenses involved, not only for the travel, but also for the need to engage another attorney familiar with the laws of that other state where the arbitration may be conducted. These critical details can greatly affect the party with lesser resources.
Frequently, the arbitration process is more lax in applying the rules of evidence, which may not necessarily be to your advantage. In the judicial system, the rules of evidence are required, and the decisions of a trial court judge are subject to review by the appellate courts for both errors of law, and abuse of judicial discretion.
In contrast, arbitration does not permit such review. Generally, once an arbitrator’s decision is rendered, there is no right of appellate review, and the arbitrator’s decision will be binding. An arbitrator is a lawyer who is selected to serve as the decision maker for a case, not a judge whose daily work involves the rigors of the judicial process.
The judicial process is open to the public; pleadings and documents must be filed in the court dockets, and may be accessed by the public. The arbitration process is less transparent, and arbitration proceedings are private, not public. Different business interests may seek the privacy of the arbitration process, and prefer submission of disputes involving their industry to panels of arbitrators who are considered experts in a particular field.
The time to decide whether to agree to accept an arbitration clause is during the negotiations which precede the parties’ final agreement and before you sign the contract. Making an informed decision is the best way to protect yourself so that important rights are not lost; understand which dispute resolution process is in your best interests.