Arbitration Clause
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Many types of contracts have an arbitration clause, but should you include one in yours? Arbitration is a type of dispute resolution that happens outside of the courtroom when two parties come to a crossroad over a contract dispute. The ruling of an arbitrator can have the same weight as the ruling of a judge. Arbitration can be either voluntary or mandatory, which comes with advantages and disadvantages. Hence, it is of utmost importance that you consult with an experienced business attorney in Los Angeles before taking any action and include an arbitration clause in your next contract. The following are some of the major pros and cons of having a mandatory arbitration clause in your contract.

Pros:

  1. Time

    While a lawsuit can takes over two years to get from the initial filing to the trial, it is common for an arbitration to take three to six months from the initial demand to the issuance of an award. Under the AAA rules, special fast-track procedures apply if neither party’s claim or counterclaim exceeds $75,000. In this case, the arbitrator is required to set a date for the hearing within 30 days of confirmation of the arbitrator’s appointment.

  2. Discovery

    In an arbitration proceeding, the long, expensive and protracted world of litigation discovery does not exist. The parties only have limited rights to discover damaging information from the opposing party. Among other things, this means that a party probably will not incur the significant costs of subpoenaing and reviewing the opposing party’s documents and taking depositions of the opposing witnesses. Under the AAA’s fast-track rules for claims under $75,000, there is no discovery (absent exceptional circumstances) except for an exchange of exhibits and lists of witnesses five days before the hearing. In other cases, the AAA rules state the arbitrator has the discretion to direct the parties to exchange documents and other information and identify witnesses, but there is no other discovery (absent exceptional circumstances) except for an exchange of exhibits seven days before the hearing.

  3. Privacy

    Arbitration proceedings are not open to the public and the parties can agree to keep the proceeding confidential.

  4. The Decision Maker

    In an arbitration, the parties can choose an arbitrator who has experience with their specific business industry and particular knowledge with the issues at hand.

Cons:

  1. Cost

    The actual fees for conducting an arbitration (not including attorneys’ fees) will tend to be much higher than going to court. Unlike court filing fees, which are relatively nominal, arbitration ordinarily entails substantial filing and arbitrators’ fees. For example, the American Arbitration Association (AAA) charges an administrative fee based on the amount of the claim or counterclaim that ranges from $975 for claims less than $10,000 to $8,700 for claims between $500,000 and $1 million. Additionally, the parties must compensate the arbitrator or arbitrators for their time. A single arbitrator’s fees can exceed $1,500 per day.

  2. Joining Third Parties

    In an arbitration proceeding, third parties who ultimately may be responsible may not be brought into the arbitration without their consent. Court rules, on the other hand, allow a party who has been sued for something for which a third party is ultimately responsible to bring that third party into the lawsuit by filing a cross-claim, thus allowing all the parties involved in the dispute to be heard before the same proceeding.

  3. Legal Errors

    An arbitrator generally is not bound by legal principles, nor does he or she have to explain or justify the decision. Additionally, the decision is not reviewed for legal errors.

  4. Appeal Rights

    Ordinarily an appeal from an arbitration award is permitted only on one of five narrow grounds:

    • the award was procured by corruption, fraud or other undue means;
    • there was evident partiality, corruption or misconduct by the arbitrator;
    • the arbitrator exceeded his or her powers;
    • the arbitrator refused to postpone the hearing or hear evidence, or improperly conducted the hearing; or
    • there was no arbitration agreement.

Consequently, an award in an arbitration proceeding is rarely overturned, even if the evidence does not support the result.

If you decide to have an arbitration clause in your agreement, it should specifically set forth how the arbitrator will be chosen and the parameters of the arbitration. It is important to weigh the advantages and disadvantages when deciding on having an arbitration clause in your agreement. For further information or to schedule an appointment with Afshin Hakim of The Hakim Law Group, one of the leading business law firms in Los Angeles please contact us at (310) 575-1825 or www.HakimLawGroup.com.