scalesandgavelWhen entering into a commercial contract, one of the issues that should be addressed up front is whether or not to include an “arbitration” clause. Typically, disputes that arise concerning the performance under a contract will be addressed, as with most other disputes, in court before a judge. However, the law permits parties to “contract out” of their litigation rights, and permits them to agree to alternate forms of dispute resolution. Perhaps the most common form of alternate dispute resolution is to have disputes arising under the contract to be resolved by one or more “arbitrators” instead of the courts.

Arbitrators are typically professionals who have experience in the industry at issue, and who are appointed to decide the dispute. (For example, in a construction defect case, a registered contractor with appropriate expertise will typically act as arbitrator.) The number of arbitrators is typically set in the contract, and usually numbers from one to three. The parties will agree to submit disputes to arbitration by including an “arbitration clause” in their contract, which will specifically provide that any disputes relating to the contract will be resolved by arbitrators rather than by the courts. The arbitration clause will typically include details concerning the arbitration procedures to be used, including which arbitration association will administer the arbitration. A properly drafted arbitration clause is nearly always enforceable and, except under very limited circumstances, the existence of such an arbitration clause will result in the courts being unavailable relating to any disputes arising out of the contract.

In an arbitration, the dispute is resolved by the arbitrator(s) rather than a judge or jury. In an arbitration proceeding, the rules of procedure, the rules of evidence, and other formal rules governing disputes that would be available in court are not available. This generally results in evidence that would not be considered reliable in court (such as hearsay, documents with authentication issues, etc.) becoming a part of the record forming the basis of the arbitrator’s decision. Also, except in very limited situations, the decision is not appealable.

Arbitrations generally move more quickly than litigation in the courts. They are also generally more straightforward, in that there is far less pre-hearing discovery, and depositions are frequently not permitted. However, the costs of arbitration paid directly to the arbitrators can be significant, and such costs can frequently far exceed all the costs incurred in court filings and other litigation expenses before the courts.

If you are a business dealing with consumer matters and if you are sufficiently careful in your business dealings that any actual wrongdoing will be unlikely, the inclusion of an arbitration clause will generally be beneficial. The arbitrator, who will almost certainly be a professional in your industry, will have an understanding of the problems and issues faced by professionals in your industry. The expertise arbitrators may bring could work against you if a serious breach or dishonest action forms the basis of the dispute, as the professional may wish to punish actors who could tarnish the reputation of the industry.

Michael L. Kitchen