Should You Include an Arbitration Clause in Your Contracts?

Should You Include an Arbitration Clause in Your Contracts?
by Pat Hill

By including an arbitration clause in your contracts with customers and suppliers, you may be able to avoid costly litigation in the event of a dispute. Your attorney can help you by drafting an arbitration clause for your contracts. What follows are some of the things you and your attorney should consider.

In order for two disputing parties to engage in arbitration rather than going to court, both must agree to the process. That is the point of putting it in your contract with the other party, to get them to agree in advance. The clause may be declared invalid, though, if the other party really didn't understand what they were agreeing to. For that reason it is important to use clear language in your arbitration clause and to make sure that the other party understands that he or she is giving up their right to go to court over a dispute.

Agreeing to arbitrate a dispute is just the beginning. Both parties will also need to agree on the ground rules for the arbitration. Issues to consider are:

the rules of procedure that will apply to the arbitration

the evidentiary rules that will apply to the arbitration,

and whether the arbitrator is bound to follow legal precedent in making a determination.

You should address these issues in your arbitration clause. You may have a difficult time agreeing on these items with a party that you are already at odds with, especially if the other party no longer wants to go through with arbitration. It will also save you time to have these ground rules specified in advance. Saving time is one of the major advantages of arbitration.

Another major issue to consider is how the arbitrator will be chosen. You will want to choose an arbitrator that you feel will be able to understand your side of the issue. The other party will, of course, want the same. If you think that the arbitrator will need to have certain qualifications to be acceptable, such as experience in your industry, say so in your arbitration clause. Your attorney can go over the qualifications that you might expect or desire in an arbitrator. You may want to require that your arbitration is a member of a professional arbitration association, such as the American Arbitration Association. In the event that you and the other party can't agree on who the arbitrator will be, you need to specify some method for deciding on an arbitrator. In the event you can't agree, you may leave the decision to a disinterested third party.

You should also address who will bear the costs associated with the arbitration. These costs will include any attorney fees that each side may incur as well as the costs and expenses of the arbitrator. You may specify in your arbitration clause that you will share the expense of the arbitrator and be responsible for your own costs. Alternatively, you might want to have the loser pay the expenses.

Your attorney can help you decide how to address all of these issues in an arbitration clause. He or she can also help you decide whether and when to include an arbitration clause in your contracts.