An arbitration clause is a very important part of a contract which states that all disputes between two parties who entered into a contractual relationship will be settled through the process of arbitration, rather than in the courts.
This is very helpful for both the businesses and consumers by ensuring a cost-effective solution for dispute resolution.
Businesses include arbitration clauses because it allows them to settle disputes quickly and quietly, without going through the often expensive and time-consuming legal system.
The main importance of including an arbitration clause in a contract before the dispute arises is that once the dispute does arise, one can force the dispute out of the court system, and so that can force the other side to arbitrate. It saves time, cost, and unnecessary harassment of the parties. Thus having a proper arbitration clause in a contract is very important.
By discussing various pros and cons of arbitration we could be able to understand why it is important to have a proper arbitration clause in a contract.
- Tailored rules:The most important advantage of arbitration clauses are its rules can be tailored to meet the needs of the parties and the types of disputes that are likely to occur under the contract. Accordingly, parties can agree to limit damages or even specify procedural rules for the discovery process.
- Expert arbitrators: A well-crafted arbitration provision will likely require that arbitrators have some knowledge or background in the issue of dispute, particularly when the issues are complex or unique. And if the subject of the dispute is technical–for example, about a patent–the parties can select an arbitrator who has technical knowledge in that field, rather than a judge who may not be familiar with the issues.
- Arbitration proceedings are generally held in private. And the parties can decide, in advance, if they want topreserve the decision as confidential. Also, it avoids some of the hostility of courtroom disputes, perhaps because it’s a private proceeding versus the public drama of the courtroom.
- Simplified rules of evidence and procedure. The often convoluted rules of evidence and procedure do not apply in arbitration proceedings which makes them less stilted and more easily adapted to the needs of those involved.
- Faster than litigation. Arbitration is usually faster, simpler, more efficient, and more flexible for scheduling than litigation.
- Expedient, convenient, less-expensive forum:Arbitration is conducted and concluded more quickly and at less cost than is associated with a court trial.
In spite of having those advantages, arbitration does have some key disadvantages that one should keep in mind before entering into an arbitration agreement. Being aware of the possible drawbacks of arbitration is very necessary to avoid further problems in future.
The main disadvantages of having an arbitration clause are as follows:
- Not always quicker or less expensive: Though the informal nature of arbitration has historically resulted in an expedited and less costly resolution but such informalities occasionally result in an inefficient process.
- Final decision is difficult to overturn:An arbitrator’s final decision is difficult to overturn as appeals are not allowed in arbitration cases unless it is proven that the arbitrator was biased or that his or her opinion violated public policy.That means arbitration implies “giving up your right to appeal a decision if you lose”.This finality can be unattractive to some parties who want to keep options open and have the ability to challenge a decision.However, non-binding arbitration isn’t favored by businesses because it allows the losing party to take the case to an actual courtroom if it wishes.
- Very Costly: Sometimes Arbitration tends to be far more financially costly than litigation. Litigation is expensive, but arbitration is even more costly. An arbitrator is paid privately by the parties involved and this cost is huge. One needs to pay for convenience, flexibility in scheduling, and getting to choose traits of your arbitrator rather than getting a random judge.
- It can be unpredictable: Unlike judges, arbitrators are not compelled to follow the rules of evidence or the rules normally associated with civil procedure. In fact, decisions can be made on the grounds of what an arbitrator perceives to be fair, rather than what the law would otherwise direct. Sometimes, there is a possibility that injustice may result as the procedure is informal in nature and the arbitrators don’t follow any specific court rule.
- Lack of transparency: As previously mentioned, the fact that arbitration hearings are generally held in private rather than in an open courtroom, and decisions are usually not publicly accessible, is considered a benefit by some people in some situations. This lack of transparency makes the process more likely to be tainted or biased, which is especially troublesome because arbitration decisions are not generally reviewed by the courts.
- Not equally beneficial for all: Arbitration is criticized on the ground that the “take-it-or-leave-it” nature of many arbitration clauses work in favor of a large employer or manufacturer when challenged by an employee or consumer who has shallower pockets and less power.
After weighing various advantages and disadvantages of arbitration, it’s clear that most businesses choose to include an arbitration clause in their legal agreements that will require arbitration in the event of a dispute.