08 / 05 / 2016

Should I Include an Arbitration Clause in My Contract?

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Regardless of whether you are negotiating a simple lease agreement to rent office space or negotiating the sale of millions of dollars of goods, many contracts include provisions for how potential disputes will be resolved.

The first, and rather uncontroversial, provision most contracts have are “choice of law” clauses. The meaning of this clause is almost self-explanatory: if there is a dispute arising from the agreement, what law do the parties use to resolve the dispute?

  • Unless there are significant geographic differences between the parties, most choice of law clauses choose the state law that is common to the parties, or choose the law of the state where most of the contract will be performed.
  • The second and more controversial aspect is deciding the method in which disputes between the parties will be adjudicated. It has become increasingly common for contracts to include agreements to arbitrate disputes between parties.

What is arbitration?

Arbitration is a form of alternative dispute resolution that allows for resolution outside the judicial system. It is often used as a method of resolving complex international transactions, but is becoming the preferred way of resolving disputes even when the stakes are smaller. Instead of litigation dragging on over the course of months, and often years, arbitration offers a streamlined mechanism that reduces the time and cost of legal conflicts.

Who resolves the dispute?

Arbitrations are adjudicated by a tribunal of arbitrators, which are essentially judges picked and paid for by the parties involved in the dispute. The decisions of these tribunals are binding on the parties and cannot be appealed. However, the decisions of who picks and who pays for the arbitrator(s) can be determined by the arbitration clause.

Should I include an arbitration provision?

That depends upon your position in the market. For example, a large company such as Verizon or American Express, which has contracts with millions of customers, is more likely to be sued than the “mom and pop” business in a small community. That is why these businesses include an arbitration clause in their boiler plate contracts. If your business requires you to frequently make transactions with hundreds, thousands, or even millions of individuals, you may want to consider including an arbitration provision in order to reduce the time and expense of potential litigation.

If you have a question about the best option to handle litigation concerning your company, contract the business lawyers at the Vethan Law Firm.

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