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Why Should My Contract Include an Arbitration Clause?

Posted by Jonathan Krems | Dec 01, 2022 | 0 Comments

In this week's Freedom Friday blog and email newsletter, I want to talk about an issue that should come up more often than not.  This issue frequently comes up in settlement agreements that I work on for various contracts, but if you're in certain industries like construction, or sometimes real estate, this is a major issue for you, as well, and that is whether you should have a “dispute resolution” clause in your contract.  In other words, when you are negotiating any type of contract, you need to figure out how disputes can be resolved in the future, in case there is a dispute between the parties in the contract.  I have read many contracts which require mediation or arbitration, as part of their “dispute resolution” requirements.  As an example of this issue, I'm answering this question in today's Freedom Friday blog and email newsletter: “Why should my contract include an arbitration clause?”

Regardless of the type of contract you're negotiating, be it a lease agreement, an exit (or separation) agreement, construction industry or related contract, or something else, ALL contracts need to include a “dispute resolution” clause which will instruct the parties how they can attempt to resolve disputes if the contract is somehow breached in the future.  These “dispute resolution” clauses typically have two parts.  The first part is “choice of law” clauses, which is usually the state in which the parties are located, or the state in which the contract will be performed.  The second part of a “dispute resolution” clause is the method in which disputes will be resolved, short of litigation.  Many “dispute resolution” clauses require the parties to attempt mediation and/or arbitration prior to suing if the other party breaches the contract.

Mediation and arbitration are different.  Mediation is when parties submit their dispute to a neutral, third-party, and that neutral, third-party individual helps the parties to see if they can identify issues and solutions, and come to a voluntary agreement to settle the dispute.  The parties are not necessarily “bound” to the mediation settlement, unless it is formalized into its own settlement agreement (which will usually have a strict “dispute resolution” clause of its own).

On the other hand, arbitration is usually binding on the parties, and it is essentially a private court.  Arbitration allows for resolution of a dispute either by a single arbitrator or a panel of arbitrators.  Arbitrators are essentially private judges selected by the parties (and privately paid).  Disputes are usually resolved through a mini-trial which is a streamlined process which saves time and cost.  At the end of the process, the arbitrator or arbitrators will make an “award” which in Oklahoma can become a judgment in civil court (the judge sometimes can be required to approve the award).

So, why should your contract include an arbitration clause?   If your contract is for significant funds, or is in an industry like construction where arbitration is standard in contracts, then yes, your contract should have an arbitration clause in it.  Arbitrating a dispute can save your business time and money, and therefore its worth considering, but always consult an attorney to see if arbitration is a good fit for your contract.

Thinking about starting a small business?  Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth?  Please contact me at [email protected] to schedule a FREE strategy session.

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About the Author

Jonathan Krems

Jonathan is the Founder and Managing Attorney of Liberty Legal Solutions, LLC, a law firm dedicated to building, protecting, and defending the business and personal interests of our clients in Oklahoma.  Jonathan's primary practice areas are business law, contracts and agreements, business liti...


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