What are the Pros and Cons of Arbitration Agreements?

Arbitration, a common form of alternative dispute resolution (“ADR”), is a way of resolving a legal dispute without suing and going to court. Arbitrations are used in many areas of law including business and consumer disputes, labor and employment disputes, and family law matters. 

The arbitration process can be similar to proceedings in a court case. The parties often have lawyers, they exchange information, and there is a hearing where witnesses are questioned, and cases are presented. After the hearing, the arbitrator will decide the outcome. However, arbitration is more informal than litigation and the procedures are simplified.

In arbitration, the parties usually have a more limited right to obtain documents and other information from each other.  Arbitrations often occur in a conference room instead of a courtroom, and the arbitrator is not always a judge, but may be a lawyer, a retired judge or simply a person with experience in a particular industry. Most arbitrations are binding, meaning, the parties must accept the arbitrator’s decision and cannot later try to resolve the same dispute in court.

Before arbitration can go forward, the parties must have agreed to arbitrate the dispute through an arbitration agreement.  Arbitration agreements are usually signed at the beginning of a business relationship – long before there’s a disagreement.  Arbitration agreements can be as short as a few sentences, and are commonly found near the end of a larger contract under a heading such as “Arbitration” or “Dispute Resolution.” Employee arbitration agreements, for example, may sometimes be buried in an employment contract or employee handbook.

An arbitration clause will typically state that all disputes arising under the larger contract must be submitted to binding arbitration. Sometimes, however, the contract might specify that only certain disputes will be arbitrated.

The arbitration agreement may also state how the arbitration will be conducted. It may specify certain arbitration rules, such as the JAMS  or American Arbitration Association (AAA) rules, and it may state whether there will be one arbitrator or a panel of arbitrators.  The agreement may also specify how the arbitrator will be chosen.

Additionally, when the parties in a legal dispute do not have an arbitration agreement, they may still agree to arbitration even after a lawsuit has been filed.

Pros of Signing an Arbitration Agreement

• Arbitration is usually faster and less expensive than litigating a case in court.
• Arbitrations are confidential, so you will not have to publicly testify. The specifics of your dispute will not be in the public court records.
• In arbitration, you can choose who will decide your dispute. This can be helpful if you want a decision maker who has specialized technical knowledge or experience in your industry.
• (Of note: Some employers will not hire you if you refuse to sign an employment arbitration agreement.)

Cons of Signing an Arbitration Agreement

• Arbitration awards cannot be appealed. You must accept the arbitrator’s decision as final.
• You cannot have a jury trial. Juries are often sympathetic to employees, and sometimes you can receive a better result in front of a jury versus an arbitrator.
• The parties’ exchange of information is more limited in arbitration. This can make it harder to develop your case in an employment arbitration or in any other situation where the other party has most of the information and documents.
• If you are asked to agree to arbitration before you even have a dispute, you may not know whether you want to arbitrate or not. If you sign the agreement and decide later that you would rather pursue a claim in court, you won’t be able to – or you will rack up legal fees trying to invalidate the arbitration agreement.
• Like all contracts, arbitration agreements can be one-sided in favor of the party who wrote the agreement. Be on the lookout for this and make sure the agreement gives you an equal voice in choosing the arbitrator, does not limit the remedies available to you, and does not deny you the right to an attorney.

Arbitration agreements are a way to limit litigation costs and keep disputes confidential. But signing an arbitration agreement also means giving up important rights. Before signing, it is important to read arbitration clauses and reject or renegotiate anything that you’re uncomfortable with.

The Diefenbach Group’s team of attorneys are experts in arbitration and understand the pros and cons of arbitration.  Whether you are a business considering incorporating arbitration agreements into your contracts, a party facing arbitration in a legal dispute, or an individual presented with a contract containing an arbitration provision, the Diefenbach Group is here to assist you.