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Should I add an arbitration clause to my business contracts?

Business professionals who are familiar with litigation know that going to court for a breach of contract or disagreement with an opposing party can be lengthy, costly and inefficient. Many contracts these days include an arbitration clause, which requires the parties to arbitrate their dispute instead of litigating it. Arbitration can be helpful in many cases. It is worth noting, however, that attorneys may recommend excluding this kind of clause in other cases, depending on the circumstances, the case and the parties involved.

What is arbitration?

Arbitration is a form of alternative dispute resolution (ADR) where the parties decide to solve their problems using a third-party decision maker (the arbitrator) instead of going through the court system. The parties get to choose the arbitrator and the process is private, making it highly attractive to companies who do not want their proprietary information to become public, as it could be if a case goes to court.

How does the process of arbitration typically work?

During arbitration, the parties involved in the dispute come together before the arbitrator to state their case. They can support their claims with evidence and testimony, and the arbitrator can bring in an expert if necessary if they are not well-versed in a specific aspect of the dispute.

What happens at the end of an arbitration?

After the arbitrator has heard both parties and reviewed all materials and evidence, they render an award to one of the parties, which is, in most cases, a binding award not subject to appeal. While it may sound like a losing game for the party who does not receive the award, it is essential to remember that litigation carries the same risk, only greater because it is typically more costly and takes more time. Most of the time, it also requires much more documentation.

Lastly, arbitration is known as a non-adversarial alternative to dispute resolution. In this day and age, when businesses and people must work together despite disagreements and differences of opinion, the ability to solve problems in a non-adversarial way can preserve the relationship between the contracting parties, and that is beneficial to everyone involved.