Arbitration Clauses in Agreements: How Desirable Are They?

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By Chetana RG Kaasam, Esq.

These days it is becoming more common to see arbitration clauses in all sorts of agreements. These include sub-contractor agreements, license agreements, and employment contracts. Parties to an agreement don’t always understand the implications of agreeing to an arbitration clause. It is important to get expert advice before you sign or use one.

A typical arbitration clause states that the parties to the agreement will submit any dispute that may arise between them to arbitration. Arbitration is a form of alternative dispute resolution. It allows two parties to settle disputes with an independent arbitrator or arbitrators, outside of the court system. Sometimes arbitration is preceded by mediation, a less formal method of dispute resolution.

Arbitral Institutions

Arbitral Institutions provide the rules that arbitrations will follow, if the parties don’t lay them out themselves. They usually have a list of arbitrators for the parties to choose from. Arbitrators are generally retired judges or seasoned attorneys.

In an arbitration clause, parties agree that the arbitration will be conducted based on the rules of a specific arbitral association. Some of the popular ones in the United States include:

  • American Arbitration Association (AAA)
  • International Institution for Conflict Prevention and Resolution (CPR)
  • JAMS

Other than these three popular arbitral institutions, there are some other highly qualified institutions which provide sector-specific alternative dispute resolution processes. These include:

  • FINRA: the securities industry
  • ARIAS: reinsurance sector
  • International Chamber of Commerce (ICC)

Should I Use an Arbitration Clause?

Factors to consider when deciding to go with arbitration include:

Costs

Parties must pay the arbitral institution’s administrative fee which is generally a lot higher than the court fees. Also, parties must bear the arbitrator’s fees in addition to their own attorney’s fees. The arbitrator’s fees and the administrative fees are mostly divided equally between the parties. In litigation, sometimes the winning party can claim all their litigation costs from the losing party.

Parties must realize that if they take the usual litigation route, they don’t have to pay the Judge an hourly fee. Arbitrator charge anything from $500 to $1500 per hour. It will add up to a considerable amount. If the parties are not equally placed, such as in an employer-employee contract, it might be burdensome on the employee. This could discourage one party from going through arbitration.

However, arbitration is less formal than litigation. The discovery and motion process is limited, which may lower those costs in comparison to litigation.

Speed

Since arbitration is less formal, parties can set the timelines themselves or get them from the arbitral institution’s rules. The dispute can be resolved much faster than if it goes through the court process. Sometimes litigation can take years to resolve.

Loss of Certain Rights and Safeguards

When agreeing to arbitration, sometimes parties voluntarily give up certain rights like the right to an appeal. Arbitral awards are typically worded as final and binding on the parties. Therefore, parties cannot appeal these awards unless the arbitrator can be proved to be biased or if the award is not sufficiently reasoned. This is highly unlikely. The grounds on which an arbitral award can be set aside are very narrow.

Similarly, parties give up their right to a jury trial when agreeing to arbitration. Jury trials may sometimes be advantageous to employees, as juries tend to sympathize with them. On the other hand, arbitration tends to favor employers. The discovery process is generally limited in arbitration. A party may therefore be curtailed from obtaining the necessary information needed to prove their case.

Conclusion

Clients must always consult with their attorneys before using an arbitration clause or signing an agreement that includes one. An experienced Chugh, LLP attorney can help you fully understand the implications of the clause and ensure that your rights and interests are protected.

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