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The advantages and drawbacks of arbitration clauses

On Behalf of | Feb 5, 2020 | Business

If you are in business, you likely deal with contracts every day. While having well-drafted agreements helps minimize disputes, you likely cannot avoid conflict forever. As such, you may want to include an arbitration clause in your contracts. Alternatively, you may have signed an agreement that includes an arbitration provision. 

Business leaders have long used enforceable arbitration clauses for a simple reason: These provisions tend to simplify dispute resolution. They also may be a cost-effective way to handle disagreements. Still, there are a few advantages and drawbacks of arbitration clauses you should consider before executing a contract that includes one. 

Advantages of arbitration clauses 

In general terms, the conventional wisdom of arbitration clauses being a cheaper and more efficient way to handle disputes holds true. There are other benefits of these provisions that also may appeal to you. For example, you can put a confidentiality requirement into your arbitration clause. This means you can control access to sensitive information. 

You can have a say in choosing the arbitrator, instead of rolling the dice on which judge hears your dispute. Finally, because arbitration is less formal than a court proceeding, you may feel more comfortable entertaining a variety of possible solutions to your dispute. 

Drawbacks of arbitration clauses 

At first blush, arbitration clauses may seem to be the way to go. There are some drawbacks to them, however. Most significantly, the arbitration discovery process is often less robust than the court-based one. As such, you may not have access to enough information to make the right choices. 

You also cannot take full advantage of court procedural rules, as arbitration usually involves relaxed protocols. Additionally, you are likely stuck with the binding findings your arbitrator reaches. 

Business disputes can be burdensome for any organization. When looking for ways to minimize your chances of having one, you may think about adding an arbitration clause to your contracts. Before you do, however, be sure you fully understand the implications of choosing arbitration over conventional litigation.