When you are entering a contract, it can be challenging to foresee what issues may arise in the future. Unfortunately, the other party may breach the contract and cause your business to suffer considerable losses as a consequence. Therefore, your business could benefit from including an arbitration clause in its commercial contracts.
Arbitration can provide you with a time-efficient means to resolve disputes that may arise between you and the other contracting party. To help you decide whether to include an arbitration clause in your business contracts, this article outlines what arbitration clauses are, as well as examining dispute resolution clauses more generally.
What Are Arbitration Clauses?
An arbitration clause typically provides the method for resolving a disagreement that might arise between you and the other contracting party. Arbitration is a form of alternative dispute resolution where an independent third party oversees the arguments you and the disputing party must present regarding the disagreement. After hearing both sides of the dispute, the arbitrator will arrive at a decision that is legally binding on both parties. This means that either party can legally enforce the arbitrator’s decision rather than rely on the willingness of the other party to implement the decision themselves.
In a broader sense, dispute resolution clauses specify what should happen in the case of a disagreement between you and another contracting party. Beyond the arbitration process, dispute resolutions can include:
- negotiations, where you and the other party openly discuss how you might resolve an issue at hand; or
- mediation, which involves a third party who mediates a negotiation but does not arrive at a legally binding decision.
Contents of an Arbitration Clause
The contents of an arbitration clause depend on how detailed your pre-contractual negotiations are with the other party. When drafting and negotiating an arbitration clause, you might consider:
- where the arbitration will take place;
- the rules for the arbitration;
- who will be involved in the process;
- the time period in which the arbitration should commence;
- whether either party can take court action if the arbitrator’s decision is unsatisfactory; and
- how both parties will share the costs of arbitration.
Advantages and Disadvantages
Below are some of the advantages and disadvantages of using arbitration to resolve a dispute. By keeping these points in mind, you can decide whether including an arbitration clause suits your business.
Confidentiality
Perhaps the most significant advantage to arbitration is its confidential nature. Unlike court proceedings which are generally open to the public, arbitration proceedings will remain strictly confidential between the disputing parties and the arbitrator. To preserve your business’ reputation, having your disputes settled in private can make a world of difference.
Informality
A dispute between two contracting parties can often lead to animosity. Unlike court proceedings where business relationships are likely to turn pear-shaped, the informality of arbitration can help ease animosity. During the arbitration, there are fewer formal rules regarding the proceedings and the evidence that parties must bring forward. Additionally, if parties are in different countries, the informality of arbitration is much more desirable than dealing with foreign court proceedings. In this sense, the informal atmosphere can facilitate mutually beneficial discussions between both parties.
Time Efficiency
As you likely know, our court system usually struggles to keep up with a backlog of cases. Rather than waiting for a court hearing, arbitration presents a quicker means to resolve a dispute. This is especially beneficial if you need to resolve a critical issue fast.
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Binding Decision
Unlike other forms of alternative dispute resolutions, the arbitrator’s decision (in the form of an award) is usually legally binding on both parties involved. Additionally, most courts will uphold an arbitrator’s decision except in some extreme cases, such as where a party has committed fraud. In this sense, an award is similar to a court judgment.
Costs
Unfortunately, arbitration does have one major drawback; its cost. Arbitration costs are almost comparable to litigation costs, especially if both parties retain legal representation. Despite this, arbitration is still a preferred method of resolving disputes, given the flexibility and time efficiency of arbitration proceedings.
Key Takeaways
In a business contract, an arbitration clause provides the method for resolving a disagreement between contracting parties. Arbitration is a form of alternative dispute resolution where an arbitrator hears both sides and eventually arrives at a decision. The arbitrator’s decision is legally binding on both parties. Arbitration presents an informal and time-efficient alternative to litigation. However, arbitration fees can be expensive.
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Frequently Asked Questions
Mediation is different from arbitration since the disputing parties are always in charge of mediation proceedings, and both parties determine the conditions for the mediation.
Yes, generally, an arbitration award is binding on the parties in the dispute.
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