Let’s say you are a startup business and you are in the process of working with your attorney to develop a contract for your future clients. Should you include an arbitration clause to resolve dispute with your clients? Nine times out of ten, my answer to you would be no.
So what exactly is arbitration? Arbitration is the private determination of a dispute between parties by a neutral third party, called an arbitrator. Arbitration is not conducted in a court, which is why it is considered a method of alternative dispute resolution. Whether or not you should include an arbitration clause in your contract to resolve disputes between you and the contracting party is a decision that must be made with your attorney, after consideration of many different factors. The following are my top considerations.
- COSTS - Proponents of arbitration claim that it is cheaper than court, however, I tend to disagree. One reason costs escalate quickly in arbitration is because you have to pay the arbitrator. In the court system, you do not have to pay judges for their time. Arbitrators are generally experienced in their particular field and charge somewhere in the range of $300-$500 an hour. So in addition to paying your own attorney, you will have to pay at least half of the arbitrator’s costs, depending on how the clause in your contract is written.
- ARBITRATOR - So who is this arbitrator? Because arbitrators are usually specialists in their particular area of law, they generally come from larger cities, and many of them are retired attorneys or judges. This means that unless you are using a large law firm in a large city that regularly arbitrates, your lawyer will not likely know the arbitrator. Which means that your attorney is not going to be able to predict how things are going to go based on the facts of the case. This is a big contrast from court where your lawyer is familiar with the procedure, knows the judges, and knows which judges are good for what kind of cases based on the facts of the situation.
- FILING FEES - If you are familiar with filing cases in court, you might be shocked by the amount of an arbitration filing fee. Filing fees for an arbitration are generally calculated based on the size of the award that the claimant is asking for. This means that the more money you are trying to recover, the more expensive your filing fee is going to be. Courts, on the other hand, generally have much lower filing fees, usually in the $100-$200 range for all cases no matter the size of the claim.
- LIMITED DISCOVERY - Discovery is the process through which the parties exchange information and documents pertaining to the claims of the case, and how attorneys assess the strengths and weakness of your case. Because discovery is limited in an arbitration, your attorney does not have as great of an ability to build your case and assess it. In addition, the document exchange process is quick and there is not a formal enforcement process for parties who don’t comply. This means that the limited discovery process for arbitration works for parties that cooperate, but for those that don’t, it is more difficult. In court cases, on the other hand, there can be as limited or in depth discovery as each party wants. There are also rules regarding enforcement of parties who don’t cooperate.
- FINALITY - This aspect of arbitration can be a double edged sword depending on which side of the decision you are on. Arbitrations are generally binding on the parties, meaning there is no right of either party to appeal an arbitrator’s decision. In court, on the other hand, you have several different ways to ask the judge to reconsider his or her decision and the right to appeal his or her decision as well.
- PRIVACY - Arbitration is entirely private. The documents filed are not public and cannot be obtained by the public. So if you’re a company that wants its disputes to be private, you may think about including an arbitration clause in your contract. On the other hand, most people do not know how to obtain information from courts, and most courts do not allow you to obtain copies of filed documents online without paying or having a subscription.
The bottom line is that arbitration is generally more suited for larger companies who do business nationwide and are being sued frequently. For startup companies, having a venue clause in your contract to litigate claims in the county in which you are located based on the law of your state is usually the better option. It is important to discuss dispute resolution with your attorney so that he or she can give you the best advice for your company.
ABOUT THE AUTHOR - LAUREN SCHRADER
Lauren Schrader is an attorney at Gutwein Law. She graduated from Valparaiso University School of Law in 2011 and she focuses primarily on litigation and employment law.