Understanding Contract Terms (post 6): Arbitration
As is the case with all the terms we discuss in this series, you have likely run across the term arbitration in a number of contracts. You also probably have a vague idea of what arbitration is. Today’s post will give you a better understanding of why contracts include an arbitration clause, including some of the benefits and drawbacks to using arbitration instead of the traditional litigation process.
First things first, let’s explore the definition of arbitration. Webster’s Dictionary defines arbitration as the hearing and determination of a case in controversy by an arbiter. Essentially, when a dispute arises between two parties, the case is brought before a neutral third party (the arbitrator), and each side presents its side of the story. The arbitrator then rules on each issue. It’s basically a mini-trial, but with an arbitrator (generally an attorney) and no jury.
Why Do Contracts Include Arbitration Clauses?
Contracts include this clause if the parties want to clearly spell out that any dispute that arises regarding the terms of the contract will be resolved via arbitration, instead of a courtroom battle. Failing to include an arbitration clause means that the injured party may seek resolution through alternative methods other than arbitration, typically litigation.
What Are the Benefits of Arbitration?
In no particular order, the following are the primary reasons why parties prefer arbitration over litigation:
- Arbitration tends to be a much speedier process, as most hearings are set on an expedited time schedule and are not subject to the court calendar, which can often be backed up for months, if not years.
- Arbitration is generally cheaper. With arbitration you can avoid the additional legal fees associated with preparing for litigation. Keep in mind, some cases, especially those with multiple parties, may result in significant costs regardless of arbitration or litigation.
- Many of the exclusionary rules of evidence don’t apply in arbitration. This allows you to bring in evidence that would not otherwise be allowed in a courtroom—so long as that evidence is relevant and non-cumulative.
- Arbitration hearings are not public hearings and, therefore, there is no public record of the hearing. For confidentiality reasons, this can be important to witnesses, attorneys, and the arbitrator.
- Typically you can select an arbitrator that is familiar with the type of dispute you are resolving, which increases the likelihood of an expedited process since the arbitrator will easily understand the dispute and its elements.
- The final judgment in an arbitration is binding and typically there is no right to appeal to the courts to alter the award.
What Are the Drawbacks?
As you’ll see below, many of the benefits of arbitration may be considered drawbacks depending on the circumstances and which side of the controversy you stand on.
- Just as the lack of the right to appeal is a benefit in some cases, it is also a drawback to arbitration. In some cases, even if the arbitrator makes an error in deciding an issue of fact or law, the decision is unappealable. There are limitations to this rule.
- There is no right of discovery unless the arbitration agreement allows for it or the arbitrator allows it. This can significantly hinder a party’s ability to obtain necessary evidence in some cases.
- There is no jury, which depending on the circumstances, can be critical for the claimant.
- There’s a greater likelihood that the final award is based more in equity than the law itself when it comes to arbitration. However, some argue this is a benefit.