Voluntary Binding Arbitration Agreements? Think Before You Act

During the past 20 years, dissatisfaction with traditional courtroom litigation caused many businesses to include binding arbitration provisions in their contracts. Recently, however, many businesses have become dissatisfied with the arbitration process, and many attempt to avoid arbitration as a dispute resolution procedure when possible. Indeed, businesses are turning to the courts for declarations that their disputes are not subject to binding arbitration.

In considering whether to include a binding arbitration provision in your contract, you should consider the pros and cons of resolving commercial disputes through arbitration as opposed to traditional litigation. Generally, the benefits of one are not afforded by the other, and which is best for your business depends on the nature of your commercial transactions.

In contrast to traditional litigation, binding arbitration as an alternative dispute resolution procedure offers:

• Privacy - arbitration proceedings are generally conducted "behind closed doors," without the need to create a public file or record;
• Informality - most discovery and rules of evidence are inapplicable in arbitration proceedings, unless the arbitration agreement specifically requires their application;
• Expediency - the informality of arbitration and the elimination of most or all discovery allow for disputes to be resolved more quickly in arbitration as opposed to traditional litigation;
• Cost savings - because of the informality and expediency, most arbitrations are concluded much more quickly, and therefore much less expensively, than traditional litigation;
• Specialization - arbitration may allow the parties to choose an arbitrator experienced or trained in the subject of the dispute;
• Unpredictability - because arbitrators generally are not required to follow legal precedent or procedural or evidentiary rules, and because many arbitrators are not licensed attorneys, the outcome of arbitration may be much less predictable than the outcome of traditional litigation;
• Finality - most arbitration decisions cannot be reviewed on appeal; thus the arbitrator's decision is final;
• Preservation of business relationships - arbitrating disputes may allow them to be resolved without the antagonism that can develop in traditional litigation, thus allowing a continuation of a profitable on-going business relationship.

If your business prefers resolving its disputes through binding arbitration, issues to consider when including an arbitration provision in your contracts include:

• Whether all disputes arising out of the contract are to be submitted to binding arbitration. If not, the arbitration provision should specifically state which disputes are excluded from the scope of the agreement;
• What substantive and procedural laws should govern the arbitration, if any. If the contract is silent on this issue, the resolution of your dispute is more likely to be governed by equitable considerations [in other words, the arbitrator may reach an outcome that he believes is fair under the circumstances, rather than an outcome required by law or the terms of the contract];
• Where the arbitration hearing will be held, the procedure and time within which to initiate arbitration, the procedure for selecting an arbitrator, and the procedure that will govern the arbitration;
• Whether damages to be awarded are limited by type or amount.

If your agreement fails to address these essential points, you may spend as much time arguing in the arbitration proceeding over whether the particular dispute is subject to arbitration, and the rules governing that proceeding, as you will spend in actually resolving your dispute.

Binding arbitration provisions in commercial contracts offer both advantages and disadvantages. While often allowing for relatively quick and less expensive adjudication of disputes when compared to traditional litigation, arbitration may not allow for a thorough investigation of the facts underlying the dispute or the opportunity to appeal an unfavorable decision.