What is arbitration?
Arbitration is a form of ADR and an out-of-court proceeding in which a neutral third party, also known as an arbitrator, hears evidence and then makes a decision. It is widely considered a more neutral, enforceable, and perhaps faster and economic dispute resolution process as opposed to litigation. This is why parties entering into contracts have increasingly started to favor this form of dispute resolution. Arbitration is essentially an agreement between two or more parties to try to resolve a dispute outside of the court system. The arbitrator, agreed upon by the parties, acts as a judge and jury. The arbitrator basically decides which party wins and loses after each side is given the opportunity to present their arguments and any relevant documents or other evidence. Parties often agree to use the rules of an established organization like the American Arbitration Association to facilitate the process. Although arbitration is considered a more informal forum, the decision resulting from the arbitration may carry the same weight as a court judgment and therefore arbitration clauses should be drafted, read, and scrutinized very seriously when entering into a contract with another party. Arbitration may be binding, which means the participants must follow the arbitrator's decision and courts will enforce it, or nonbinding. While binding arbitration is more common, non-binding arbitration refers to a situation where the parties agree to use arbitration as a forum to try to resolve their differences, but neither party is bound to comply with any decision by the arbitrator- meaning either party is free to reject the arbitrator's decision and take the dispute to court as if the arbitration had never taken place.
Are arbitrations voluntary?
If the parties agree to it, arbitration can be voluntary. It may also be mandatory as well if a particular law requires it. Most arbitrations occur because the parties decided to include an arbitration clause requiring them to arbitrate any disputes "arising under or related to" the contract. Once the dispute is initiated, it may be difficult to reach an agreement to arbitrate if an arbitration clause was not already incorporated into the contract.
What are the benefits of arbitration?
Arbitration is usually considered a simpler, expeditious, and more efficient than litigation. While litigation can be dragged on for an exorbitant amount of money, arbitration may be quicker and a much more relaxed procedure than going to trial. It is also more desirable since it avoids some of the hostility of courtroom disputes with one reason being it is a private proceeding rather than in the public courtroom, which also makes the whole proceeding less adversarial in general. Another great advantage is that if the subject of the dispute is technical in a particular area of the law or industry, the parties can select an arbitrator who has technical knowledge in that field, rather than a judge who may not be too familiar with the issues. While this aspect is not always advantageous depending on the circumstances and which party loses or wins, arbitration can bring finality to a dispute. If the arbitration is binding, the losing party cannot appeal the decision unless they demonstrate extraordinary circumstances such as bias, fraud, or inappropriate actions by the arbitrator. However, for the winning party, this kind of finality removes the threat of ongoing appeals as is in the lengthy and indeterminate nature of litigation. Thus, once a decision is rendered, the case is over.
What are the disadvantages of arbitration?
The main disadvantages are that unlike a court ruling, a binding arbitration ruling can't usually be appealed and there is no automatic right to discovery. Discovery is the process by which the parties have to disclose information about their cases to the other party. Furthermore, the arbitrator may not alter the contract terms or award any remedy not provided for in the contract unlike in litigation where the judge or jury may determine the award for damages. Transparency is also an issue when it could be advantageous to have a proceeding conducted in a more public setting for certain parties. A lack of transparency makes the process more likely to be tainted or biased, which is especially troublesome because arbitration decisions are so infrequently reviewed by the courts and there are no guarantees that arbitration will be a fair process. For example, if a party were concerned about a large jury verdict in the event a dispute ever arose, that party would negotiate for an arbitration clause so as to keep things out of court if a dispute were ever to arise. In view of the potential for a large jury verdict on a wrongful termination case, this might explain why an employer would want an arbitration clause in an employment contract. Given the potential for a large jury award on a malpractice action, this would also help to explain why a medical provider would want a patient to sign an arbitration clause.
What can you do to be informed and protect yourself when signing a contract with an arbitration clause?
It is first crucial to recognize that the fine print or “boilerplate” language of a contract is no less significant than any other major term or provision of a contract. Secondly, reviewing the contract before you sign and inquiring into foreign terms or unfamiliar provisions may aid in preventing miscommunication, leave open the possibility of negotiations through an experienced attorney, and allow you to become informed before signing such a contract. Lastly, know what it means to agree to be bound to an arbitration clause and always keep open the possibility of walking away from a deal if you are not willing to bind yourself or your business to such terms.
Ultimately, you should always know your rights and what rights you may lose before you sign a contract containing an arbitration clause. While in many business situations arbitration may seem reasonable, it may be a different situation where other rights are involved that could potentially have an impacting and/or devastating effect on you personally in the event of a dispute. Examples would include anything having to do with your job or with professional services that might be rendered to you. By binding yourself or business to an arbitration clause in those circumstances, you may be giving up an opportunity to go to court on an injury where a large jury verdict might result in your favor and so you may not want to agree to arbitration. Therefore, it goes without saying that engaging an attorney with experience in reviewing, drafting and litigating contractual disputes including those containing arbitration clauses is an important way that you can understand your rights and take the necessary steps to protect yourself before entering into a contractual relationship with another party.
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