Wise businesses avoid all unnecessary contract disputes but still plan for them. An arbitration clause inserted in a contract predetermines which potential disputes an arbitrator, instead of a judge, will resolve and how the arbitrator will resolve them.		The clause and its scope are negotiable, just like anything else in a contract. The contracting parties may decide if the arbitration will be binding or non-binding, and even which jurisdiction's law the arbitrator will use when deciding the case.

 Advantages
Compared to the typical lawsuit, often decided in the judicial realm, arbitration proceedings are more informal, more flexible, and afford businesses several advantages relevant to efficiency and control.

Efficiencies
Courts support the increased efficiency of arbitration, regularly upholding an arbitrator's award and giving deference to the arbitrator's expertise in a given area.

• Arbitration is usually faster. Court cases can take years to resolve while less formal arbitration proceedings do not have lengthy discovery, deposition, motion filing and court calendar delays.
  
  
• Arbitration is usually much less expensive. Because of the shortened process, legal fees are lower, and businesses also avoid the possibility of paying high punitive damages awarded by an unpredictable jury

Control
Arbitration proceedings are not constrained by the procedural rules of courts of law and are therefore more under the control of the parties.

• Arbitration is private. Courts serve as public forums, while arbitration proceedings are private affairs. A business's public image need not be associated with legal action.
  
  
• Because of the less formal process, a business is not required to divulge extensive discovery to the other side, and is therefore more able to control the information in the proceeding.
  
  
• Arbitration is less combative. Because arbitration is more controlled by the parties without the strict procedural rules of courts, arbitration awards often reflect a mediated or negotiated outcome satisfying both sides of the dispute.

Disadvantages
Arbitration clauses are not omnipotent tools, however.

• An arbitration clause will not trump warranties, or claims allowed under bankruptcy law, or specific statutes like state consumer protection laws.
  
  
• There may be disputes you want to litigate, but your business may be forced to abide by an arbitration clause regardless of how morally right or factually sound your case may be; arbitration clauses can cut both ways.
  
  
• Finding and agreeing on a qualified arbitrator may be problematic depending on the expertise and experience both parties desire.
  
  
• Arbitrators are not judges and are not required to explain their awards the way judges are required to explain decisions; you may not get what you believe fair.
  
  
• Appeal is usually allowed only when a major defect can be shown in the process (i.e. one side acted fraudulently) or when the arbitrator is guilty of misconduct or absolutely did not make a final decision on the subject matter submitted.
  
  
• Even after an award is made, court action may still be needed to enforce the award.

Enforceability
Even where an arbitration clause is included in a contract, courts may not always enforce the clause itself. For any arbitration clause to be enforceable, all parties to the contract must know of the clause, what it means, and what it covers. Courts will not enforce an arbitration clause if there is something very wrong with the clause or contract as a whole; e.g. the arbitration clause imposes unfair conditions on one party but not the other in fees or location, or is binding only on one party and not the other, or the contract was induced by fraud or compelled unfairly. Arbitration clauses in consumer sales contracts offered on a take it or leave it basis are generally enforced, but like any other agreement, must not be induced by fraud or be compelled unfairly.

Practice Tips
When including an arbitration clause consider what types of dispute may arise. As between the parties, if you're the one with the most to lose, to what degree will the discovery process be needed to enforce your rights? Consider what law and procedural rules and what type of arbitrator you would like. For example, if the parties in a dispute live in different states, which state's law will the arbitrator use to resolve the dispute? Consider the experience level of any proposed arbitrator and the arbitrator's understanding of the disputed subject matter. Do a costbenefit analysis of how often your business is threatened with legal action; if it happens more often than you'd like, an arbitration clause will probably save time and legal fees and may provide more control over business disputes. All the above planning and problem solving should, of course, be done with the advice of competent corporate counsel. Arbitration clauses must be tailored to the specific needs of the parties.

© 2002 Du Val Business Law, P.C. Suite 103 The Durham House 1012 SW King Ave.  Portland, Oregon

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