Going to court or going to war? For most people, the two words refer to the same thing when it comes to legal disputes. To avoid ‘going to war’, dispute resolution methods such as arbitration are becoming the weapon of choice.

Why would anyone want to implement arbitration over the traditional litigation proceedings?

  • It is cost-efficient and much faster than resolution through the judicial system
  • It preserves the relationship between the parties
  • It can be more informal and less court-like

Arbitration is being used to solve a wide range of issues. In a recent case, 14 Senators took to arbitration to resolve a  dispute regarding expenses claimed in millions of dollars!

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To trigger this process, arbitration clauses are added to agreements between parties so that the disputants may opt out of the legal system. Sounds great right? With every new solution to an aged process comes a list of problems:

  • The desire to resolve a dispute through arbitration can vary significantly depending on the seriousness of the dispute and the types of remedies sought by the parties.
  • One-sided agreements may leave you with very few options for a fair outcome
  • Courts cannot always intervene, and you may find yourself stuck in an arbitration process that may not be appropriate for you

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Here are four key items to look out for when you determining whether to include an arbitration provision.

 

1. What is the scope of disputes that may fall under arbitration?

Certain arbitration clauses may only cover certain types of disputes (for example, non-payment), which may result in too narrow of a scope for arbitration.

However, if you are looking for a specific remedy (for example, injunctive relief), that may not be guaranteed through arbitration, you may prefer a narrow scope of arbitration, since a broad arbitration provision would then obligate you to proceed with arbitration first.

In  Pietrasz v Eminata Group, Mr. Pietrasz encountered a similar problem after he was terminated from his position. When Mr. Pietrasz initiated a wrongful dismissal claim, the court refused to resolve the complaint. Instead, he was directed to the arbitration proceeding as outlined in his employment contract.

2. What to consider when selecting an arbitrator?

Know how your arbitrator is selected! An arbitrator may already be decided for you, but if your contract gives you the option to select one (or more), there are certain characteristics that you need to be aware of:

  • Expertise – Consider whether the arbitrator has expert knowledge in the issue being disputed.

  • Impartiality – Research your prospects to ensure that the arbitrator is not affiliated with the opposing party or does not hold bias views on issues at dispute.

3. How to initiate the arbitration process?

An arbitration provision will generally state the seat of arbitration (for example, the International Chamber of Commerce (ICC)). The seat for arbitration will generally be helpful with:

  • Rules – The rules of a seat will outline the procedure that the seat follows for their arbitration proceedings.
  • Forms – The seat will also have their own procedural forms that must be completed to initiate arbitration and to provide a defense to an arbitration claim.

4. Is the decision final and binding?

Don’t underestimate the power to contract – decisions may be final and binding in a contract, so the court cannot intervene by way of appeal.

You may decide to allow an appeal process in your contract. While courts may play a role in ensuring that the arbitration process is fair and that the award (remedy) is enforced, courts have little power in changing the award offered in arbitration.

Conclusion

 Arbitration can be a very useful tool but make sure that you know the details before committing. It is important to know the ins and outs of your arbitration clause – starting with these four points – to keep yourself informed and prepared. Because, you wouldn’t go to war without your weapons!

Take-Aways

  • Arbitration is a go-to dispute resolution mechanism for its cost-effectiveness and efficiency
  • Arbitration should be contracted in the parties’ respective contract, and should include important provisions such as: scope of arbitration; choice of arbitrator; choice of seat; etc.
  • Arbitration may not be appropriate in all circumstances, so everyone should weigh its benefits against its drawbacks when including in a contract

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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