Should I Include an Arbitration Clause in My Business Contracts?

Contract litigation can be costly for a business. Therefore, a contracts lawyer includes numerous clauses in a business contract to reduce contract disputes. The clauses specifically address the legal rights, duties, and responsibilities of all parties. An arbitration clause is an often-used clause that a Maryland business attorney incudes in small business contracts.

What Is Arbitration?

Arbitration is a form of alternative dispute resolution (ADR). ADR is used to resolve disputes without litigation. ADR includes arbitration and mediation. 

Generally, business contracts that include an arbitration clause require binding arbitration. Binding arbitration means that both parties agree that the decision made by a neutral arbitrator during the arbitration process will be final. As a result, the parties waive their right to file a lawsuit for disputes arising from the contract. However, contracts may also provide for non-binding arbitration. If the parties agree to non-binding arbitration, either party can pursue court action if they disagree with the arbitrator’s decision. 

Advantages of Arbitration

There are many advantages of placing a mandatory arbitration provision in a contract. Five advantages of using binding arbitration to settle contract disputes are:

Arbitration Is Typically Less Expensive Than Court

Typically, the arbitration process is less expensive than filing a lawsuit to settle a business dispute. Arbitration takes less time to complete because the court’s schedule does not limit the parties. Furthermore, arbitration is not restricted by the court rules and procedures that parties must follow if they file a lawsuit. Unlike judges in a court-litigated matter, the parties must pay arbitrators for the time spent adjudicating the matter.

Arbitration Is Private

Business lawsuits are a matter of public record. Anyone, including the media and your competitors, can follow the case and read the pleadings and motions filed with the court. However, arbitration is private. 

During arbitration, the arguments and documents presented to the arbitrator are not a matter of public record. Therefore, the parties need not worry about their trade secrets, operational details, or other sensitive information being released to the public. 

You Can Choose The Arbitrator

The parties may choose the arbitrator who decides the case. The right to choose an arbitrator is essential. The parties may choose an arbitrator with specialized knowledge regarding the disputed issues and the type of business involved. Judges may not have the specialized knowledge necessary to understand the technical aspects of the dispute.

Opinions Can't Be Appealed

Generally, arbitration is binding. Neither party can appeal the arbitrator’s decision or file a lawsuit. However, binding arbitration may be subject to appeal or litigation if the arbitrator was biased or the decision is against public policy. 

You Can Limit Discovery

The discovery phase of a lawsuit is often the most time-consuming and costly aspect of suing another party. Both parties can request information and documentation from the opposing party and other parties who might have information relevant to the case. Discovery may result in numerous court hearings, delays, and costs. An arbitration clause may limit discovery or prohibit traditional discovery entirely. 

Creating an Arbitration Clause

Drafting an arbitration clause requires specific knowledge of contract law and knowledge of the judicial process for settling disputes. Issues you should discuss with your Maryland business lawyer when drafting an arbitration provision include:

When Is Arbitration Required?

An arbitration clause could be worded broadly to include all disputes arising from the contract. On the other hand, a party might limit arbitration to specific causes of action. There are instances where it might be best to enforce your legal rights through the judicial system. For example, you might want to retain your right to sue for disputes related to intellectual property or unfair trade practices. 

Who Will Handle The Arbitration?

An arbitration clause may stipulate who can serve as an arbitrator and whether you will use one arbitrator or a panel of arbitrators. For example, the clause might state that the parties must use an arbitrator with JAMS or the  American Arbitration Association. In addition, the clause might stipulate that the parties may propose three potential arbitrators, and the parties must choose one of those arbitrators.

What The Rules Are

The clause should state how the parties will choose the rules of arbitration. Often, the parties use the arbitration provider’s list of suggested rules to choose the rules for their arbitration. Issues you should consider as you draft your arbitration clause include:

• Attorney Fees

Who pays for attorneys’ fees. Does each party bear the cost of legal representation regardless of the outcome of the arbitration? Is the “losing party” required to reimburse the other party for their attorneys’ fees?

• Procedural Rules

The parties need to address some procedural rules, even though the arbitration process is not bound by the same court rules as a lawsuit. For example, can the parties request the arbitrator examine the claim to determine if there is sufficient evidence to justify proceeding with arbitration? The rule would permit either party to file a motion to dismiss to avoid the time and expense of arbitration when there is not a legal dispute or cause of action to justify arbitration.

• Discovery

The parties may limit discovery or make discovery unlimited. Whether discovery is unlimited or limited, there should be rules stipulating conditions for the cost of discovery, time limits, and delivery methods.

• The Effect Of The Arbitrator's Ruling

As stated above, arbitration may be binding or non-binding. Some companies make binding arbitration a part of their standard business contracts. However, there could be instances in which non-binding arbitration might be preferable. 

• Enforcing The Arbitrator's Ruling

The jurisdiction for enforcing the arbitrator’s decision must be included in the contract and arbitration rules. The jurisdiction of enforcement could be an important advantage for the company.

Contact Our Maryland Business Lawyer for More Information 

If you have questions about business contracts, contact our law firm to speak with an experienced Maryland contracts attorney. Steve helps small to mid-sized business owners protect their investments and assets by drafting comprehensive business contracts explicitly tailored for their business.