When business disputes arise — and they will — many companies may believe that litigation is their only option to secure resolution. While the courts may provide one avenue, arbitration is often another very effective way to deal with a variety of issues.
For this reason, companies of all types and sizes should consider using arbitration clauses in their contracts. An effective and enforceable arbitration clause in a contract can be the difference between a lengthy and expensive jury trial and a more efficient resolution by a knowledgeable decision-maker.
What is the arbitration process?
Arbitration is a dispute resolution process used by thousands of businesses in every industry to resolve their disputes economically and efficiently without the cost or time of going through the courts. It involves a trained professional, called an “arbitrator,” who acts as the decision-maker and serves as both the judge and jury would in a trial.
Arbitration should not be confused with mediation, which is a process by which the parties agree to have a neutral third party help them reach a resolution of the case prior to trial or an arbitration hearing. Unless the parties reach an express settlement agreement during the mediation, the mediator cannot impose a binding decision.
In arbitration, however, the arbitrator hears evidence and argument during an evidentiary hearing, similar to a trial, and has the authority to make a decision about the dispute. The parties are then bound by that decision, similarly to how they would be bound by a jury’s verdict.
Unlike traditional trials, arbitration can sometimes be completed more quickly, particularly where discovery is limited by the arbitrator. On average, court cases take more than 12 months longer to get to trial than cases adjudicated by arbitration and require at least 21 months longer than arbitration to finally resolve.
The Benefits of Arbitration
One primary goal of arbitration, as previously discussed, is to help the parties reach a swift resolution without the high costs of litigation. Arbitration may help the parties avoid years of battling over written discovery, depositions and motion practice, and instead get to a fair resolution in a shorter period of time.
An effective arbitration agreement can allow a business to avoid highly public litigation in the event of a dispute. Parties in arbitration can keep the proceedings somewhat confidential, unlike court filings which are generally public documents.
Further, an arbitrator may be a knowledgeable industry professional, and ideally, they would have experience with the company’s industry and the type of dispute being arbitrated. In certain types of disputes, the arbitrators may be trained professionals with expertise in specific areas of arbitration, including employment, labor, construction, commercial and international disputes.
Finally, parties to arbitration can agree that their disputes will be handled individually, rather than on a class action or multi-claim basis. Some civil lawsuits involve multiple plaintiffs joining their claims together against an organization. Arbitration provisions in a company’s contract may specifically disallow class or multi-claimant arbitrations.
The Risks of Arbitration
While arbitration can be a useful and effective tool, the process — like everything — has downsides. Depending on the nature of the dispute, and the arbitrator and parties involved, arbitration does not always result in a shorter, more cost-efficient, or more predictable process. There may also be situations or industries that are not suited for arbitration
If the arbitration clause does not contain well-crafted arbitrator selection procedures and hearing rules, the process could be as uncontrolled, lengthy and expensive as a case in court.
Arbitration is also binding. If a party receives an adverse outcome at arbitration, the party’s rights to appeal may be limited as compared to those in civil litigation.
Considerations When Drafting an Arbitration Clause
To reap the benefits of arbitration, a company must carefully craft its contracts to ensure enforceability and that the arbitration process is most effective for resolving the specific disputes the business is likely to face. The language must also provide for a fair and efficient arbitration process.
Parties must also intentionally agree to arbitration. Businesses may include arbitration clauses in their contracts, with the goal of preventing lengthy and expensive litigation. However, the U.S. Supreme Court has consistently held that parties must explicitly and unambiguously consent to arbitration agreements for the clause to be enforceable. The foundational principle of arbitration is consent.
Contracts should also specify if the parties want to use specific organizations to conduct an arbitration, such as the American Arbitration Association (AAA) or Judicial Arbitration and Mediation Services Inc. (JAMS). These organizations have pools of pre-qualified arbitrators and published rules and procedures. Arbitration clauses should also indicate the specific rules and procedures to be used. Companies may also have to register their proposed arbitration provision with either AAA or JAMS, usually for a fee, in order to have that organization administer the arbitration procedure, should a dispute arise. Even if the parties choose to arbitrate under AAA, JAMS or another similar entity, they may agree to some of their own unique procedures — especially related to arbitrator selection — in the arbitration clauses in their contracts. A company may specify in its arbitration clause that it wishes to utilize a panel of arbitrators, rather than one single arbitrator. While this is more expensive, it may result in broader viewpoints than in the case of a single arbitrator with the power to decide the entire dispute.
Similarly, a business may specify the process by which the parties decide on arbitrators through a system of reviewing a list of arbitrators and each party having an opportunity to “strike” from the list until arbitrators are selected. If there are no selection procedures in an arbitration clause, the administrative organization (AAA, JAMS, etc.) may simply assign an arbitrator at random without any input from the parties.
In addition, when drafting an arbitration clause, businesses should keep other procedural specifications in mind, such as pre-selecting a location to settle arbitration disputes to ensure that the location of the arbitration is fair and neutral to all parties involved.
Arbitration may be a useful tool for many businesses to resolve disputes, provided it is handled properly. Of course, any decision to include arbitration clauses in contracts should be made in consultation with experienced legal counsel. This will help ensure clauses are enforceable and appropriate to the unique circumstances of the business.
Amber Hall is an associate at Lightfoot, Franklin & White LLC in Birmingham. The author thanks summer associate Wesley Smithart for her contributions to this piece.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all content in this article is for general informational purposes only. Readers of this article should contact their attorney to obtain advice with respect to any particular legal matter.