In today's Freedom Friday blog and email newsletter, I want to talk about an issue that I've talked about before, and that is arbitration versus litigation. I get a lot of questions about arbitration… should a contract include arbitration for dispute resolution, should I choose arbitration as a way of resolving a lawsuit instead of litigating, what are the advantages and disadvantages of arbitrating or litigating, is arbitration truly less expensive than litigation (sometimes yes, sometimes no). In today's Freedom Friday blog and email newsletter, I'm answering the question, “How should my contract resolve a dispute?”
Most people have agreed to an arbitration agreement and didn't even know it. If you've ever accepted the terms and conditions for a large company (think global company), it probably included an arbitration agreement. This means that if you have a dispute with them, you will need to submit it to arbitration rather than sue the company, and if you do sue the company, that large, global company will likely ask the court to remove the case to arbitration, and the court will oblige. This is also true with car dealerships. If you buy a car, or take out a loan on a car, and there are issues with the car or the loan (some kind of fraud or other issue), most of those issues will be required to be resolved through arbitration rather than the courts. So, if arbitration is good for large, global companies, is it good for you as a small business in your own contracts?
Every contract should include a dispute resolution process. I've seen many which include a mediation requirement, some include an arbitration requirement, and then others are straight litigation (going to court). Mediation is different from arbitration in that it is not binding, and the mediator is there to help both sides come together to a compromise resolution if that is possible. Arbitration, however, is a private dispute resolution process, and it is usually binding on the parties once the arbitrator makes a decision. An arbitrator's decision can be challenged in court, though, under certain circumstances. But the parties to the dispute cannot arbitrate their dispute unless the contract explicitly requires arbitration. This means there will be an arbitration clause in the contract itself. These are sometimes good arbitration clauses, and sometimes not. I once reviewed one for a client, and it did not provide enough specifics, but it was still very valid. I wish that client had an attorney review the contract before the client had signed it and was bound to arbitrate their dispute.
There are several factors you should consider when creating a dispute resolution clause in your contract, and choosing whether you want to require arbitration or not. The first factor you should consider is the nature of the type of dispute which may occur. The more complex of a dispute you expect, the more you should maybe not consider arbitration as a dispute resolution process in your contract. Another factor to consider is the desired outcome. If you want a public record and a court-ordered resolution, then you should choose litigation and not include an arbitration clause. However, if you want a more private or efficient resolution, then arbitration may be a consideration. Depending on the type of dispute, litigation may be more formal and costly than arbitration, but this is not always true. In many cases, especially complex ones, litigation is definitely more costly and formal, due to the nature of the discovery process, depositions, etc. However, in some instances, arbitration can be more expensive than filing a suit and going through the courts. One thing is certain, though, and that is if you agree to arbitrate a dispute, that agreement will be made long before the dispute. This means that if you think arbitration would better serve your business in order to resolve contract disputes, you need to consult with a business attorney like me at Liberty Legal Solutions, LLC, and discuss your options.
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