Should Your Contract Contain an Arbitration Clause?

Rising legal costs have increased the appeal of arbitration clauses in contracts. In the event of a contract dispute, arbitration can reduce the legal fees for all parties involved. This article gives an overview of the arbitration clause in contracts along with ways small businesses can use it to

When you are ready to sign a contract, the idea of future disputes can sometimes seem miles away. But contract disputes do happen, and depending on how they are resolved, these disputes may require legal assistance. Arbitration is a way of resolving these disputes without lawyers or the court system, thus saving you a substantial amount of money in legal fees.

Lawyer fees can be $400 or more an hour plus expenses. At prices like this, legal costs can quickly skyrocket, driving up your overall business expenses. (You can still accrue some legal fees in arbitration, however, as lawyers do sometimes write the contract clause and represent the parties involved in the dispute.)

The arbitration clause in commercial contracts can contain the following provisions:

• It states that all disputes arising from the contractual agreements are to be settled by binding arbitration in whatever state and city you do business.
• The dispute will be reviewed and decided by an independent arbitrator as set forth under the current commercial arbitration rules (JAMS, FAA).
• Each party will pay their personal legal expenses.
• The judgment of the arbitrator is binding to each of the parties and final, in the sense that you or the other parties of the contract have no legal recourse relating to the arbitrator's decision.

JAMS

The JAMS Foundation dedicates itself to the resolution of contract disputes. It offers detailed advice on both mediation and arbitration processes. This includes the names of independent arbitrators, also known as neutrals. JAMS also provides a series of sample arbitration clauses that you can insert into your contracts.

In addition to arbitration (which is binding), the neutral can preside over a nonbinding mediation process. The neutral arbitrates regarding:

• Discovery requests and disputes
• The application and degree of the rules of evidence
• Expert witnesses and cross examinations
• All pertinent evidence
• Arguments for all involved parties
• The settlement of the disputes using rules set out by JAMS

The arbitration clause of the contract determines the jurisdiction of the arbitrator. This, along with submissions of the parties in the dispute, is what the arbitrator uses to decide the arbitration. Usually, the arbitrator schedules a preliminary conference that sets the date for the hearing along with a schedule for the submission of evidence and exchange of documentation between parties involved in the dispute.

The Federal Arbitration Act

If the contract containing the arbitration clause does not specify the provisions for arbitration, then the guide for arbitration becomes the Federal Arbitration Act (FAA). The FAA was enacted in 1925 and revised in 2000 under the Revised Uniform Arbitration Act (RUAA) as a means of curbing the number of court cases involving contract disputes.

Although arbitration can save time and money, it does have some drawbacks: You may not have as much time for discovery in the form of evidence to support your case or disprove your opponent's suppositions. Also, if for whatever reason the arbitrator has a predisposition against your case, you have no legal recourse.

Unfortunately, as more companies turn towards arbitration as a means of settling their disputes, they are hiring lawyers because they want the upper legal hand to win the case. As businesses retain high-priced lawyers to win their arbitration case, the costs escalate. This throws a wrench in the arbitration process as it began as a way to rein in exorbitant legal fees.

Visit the AllBusiness.com forms and agreements section to see a sample Arbitration Agreement.