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Should You Include a Mandatory Arbitration Clause in Your Contracts?

12/08/2012 | Winter 2012 Newsletter
It is a question that experienced clients who have just negotiated a business deal not infrequently pose as they turn to their lawyer to “paper” the deal and prepare the formal contract: “What if the deal goes sour? Should we include an arbitration clause in the contract? Isn’t arbitration better, faster, and cheaper than a full-blown lawsuit?”

It is a good question. Unfortunately, as with many good questions, the answer is “it depends.”

More and more 21st century contracts include arbitration clauses. In part, this is a consequence of widespread dissatisfaction with the expense, delay, and out-of-control discovery process all too often associated with litigation. In part, it stems from conscious decisions to avoid the wild card that juries pose. In part, it is the result of successful marketing by alternative dispute resolution organizations.

Arbitration, however, is itself far from cost, or risk, free. As to cost, an arbitration often necessitates the expenditure of significant fees that are absent from the traditional litigation process. For example, the filing fee for a court case commenced in New York, either in state or federal court, is a few hundred dollars. Arbitration filing fees in matters involving significant disputes run in the thousands, and often tens of thousands, of dollars.

Similarly, clients are often surprised, and sometimes angered, to learn that during an arbitration, the client is not only paying for his or her own lawyer, but must also foot a share of the bill for the arbitrator. While the responsibility for payment of judges lies with the taxpaying public, it is the individual parties who must pay for the arbitrator, who, like the party’s lawyer, charges for his or her time on an hourly basis.

Additionally, burdensome discovery is hardly unknown in the realm of arbitration. All too often, the private lawyers who serve as arbitrators readily grant one side or the other’s request that substantial paper discovery and the depositions of parties, or even non-parties, be conducted prior to any actual hearing, thus exponentially increasing the arbitration’s cost and significantly lengthening the process.

Arbitration also poses its own set of risks. For instance, while the quality of judges varies greatly, with litigation one is at least guaranteed that the person overseeing one’s case handles such matters as a standard part of his or her job. Many arbitrators handle arbitrations simply as a sideline to their own private practices and are largely novices at the task. Compounding that risk is that it is extraordinarily difficult successfully to appeal an adverse arbitration decision.

The question of whether to include an arbitration provision in a particular contract thus entails a weighing of relative potential advantages and disadvantages, an assessment that the client and lawyer should analyze carefully together in light of the specifics of the situation presented.