A Predispute Arbitration Clause – Arbitration Agreement Explained

Agreeing to arbitration before a dispute: in most signed contracts, there are predispute arbitration clauses.  Businesses and companies have been implementing arbitration as a way to resolve disputes outside of traditional litigation.  It creates a space for parties to resolve disputes confidently and efficiently while still issuing a binding decision for the parties to follow. As the popularity of arbitration has grown, so has the prevalence of including predispute arbitration clauses in contracts. The inclusion of predispute arbitration contracts allows the parties that use them to ensure that disputes arising from contracts are submitted to arbitration, along with various other benefits that this article will discuss later.  This article will also define a predispute arbitration clause and the vital characteristic and inclusions in a predispute arbitration clause.

What is a predispute arbitration clause?

It is a clause is a clause, usually contained in part of a larger contract, that outlines an agreement between the parties to submit any dispute arising from the contract to arbitration.  This is called “predispute” because it happens before there is an actual dispute arises.  It contemplates disputes that may arise after the contract is executed that the parties want to be submitted to arbitration. A predispute arbitration agreement can be compared to a post-dispute arbitration agreement, which is an agreement to submit a particular dispute to arbitration.  A predispute arbitration clause outlines how disputes that arise under the contract will be decided.  Usually, this includes the jurisdiction that the arbitration will take place in, the rules that will apply to the dispute, and binds the parties to the arbitrator’s award.

What does it mean to submit a dispute to arbitration?

Arbitration is a method of resolving disputes outside of traditional court systems.  The system allows arbitrators to hear cases and then issue an award that determines how the parties will resolve their dispute between the two of them.  The arbitrator is a neutral party chosen by the parties or an arbitration organization to handle the dispute.  Arbitrators will hear evidence presented by each party and then issue an award that will control the case.  Usually, this award will be binding between the parties, meaning that they have to follow what the arbitrator decides. This aspect will be further explored when considering the elements that should or should not be included in a predispute arbitration clause.

What is the purpose of a predispute arbitration agreement?

Arbitration is an entirely voluntary process, so the parties must agree to submit the dispute to arbitration.  A predispute arbitration clause allows the parties to avoid having to agree on arbitration after a dispute arises and potentially disrupted the relationship between the parties.  It allows the parties to plan for a time when their contractual relationship may not be as strong as it is in the beginning and providing a way for the parties to know early on how their disputes will be handled.  Including an arbitration clause in a contract can give the parties peace of mind to know and understand how their disputes will play out.

Will a predispute arbitration clause always be followed?

In the United States, arbitration clauses contained in contracts are often enforced unless they are unconscionable or signed under duress or fraud.  A party that believes the arbitration agreement is not proper may challenge the enforcement of the clause in a standard court.  While there are different standards in different states and courts, there are some similarities that might help one find and figure out an unenforceable arbitration agreement.

  • Unconscionable: An unconscionable arbitration agreement is one that is so unfair in both the procedure and substance.  This is usually discussed with contracts of adhesion, or contracts where one party has little or no say over the terms of the agreement.  These are often in take-it-or-leave-it contracts, where the seller defines the terms.  This is an example of procedural unconscionability—one side has very little bargaining power.  Substantive unconscionability is often found when the substance of the agreement, such as the choice of arbitrator, is so unfair to make it an invalid contract.
  • Duress: The duress defense to an arbitration clause means that the party challenging the arbitration clause signed the agreement under intense pressure from the other party or someone under their control.  Different states have different definitions of what duress means, but a court usually looks at the position that the challenging party was in at the time that the contract was signed and at the cause of their duress.
  • Fraud: Froud will render an arbitration agreement unenforceable when there evidence that the agreement was fraudulent in some way.  This could be that one of the parties was told the agreement was something else, or the clause was added to the agreement after it was signed.  As long as the actual agreement to arbitration was obtained fraudulently, there is a question of whether the agreement should be honored.

Courts, especially courts in the United States, tend to lean more toward enforcing an arbitration agreement.  In the absence of the factors listed above, courts see arbitration agreements as agreements that a party entered into willingly and knowingly.  Additionally, courts see upholding arbitration agreements as a vital part of encouraging alternative dispute resolution as an option for litigants as they move through the system.  Nonenforcement would encourage parties to sign agreements knowing that they can be overturned by the courts and would undermine the validity of such agreements.  Therefore, the United States continues to encourage enforcement of arbitration agreements in the absence of issues listed above.

Why should parties choose arbitration?

Arbitration provides a variety of benefits for parties that choose to use the process to resolve their disputes.  However, arbitration is not the right fit for every dispute that arises.  For example, criminal conduct must be prosecuted by the appropriate authorities and cannot be arbitrated.  Other disputes will be incredibly complicated or involve legal issues that courts are interested in litigating.  Considering the benefits that arbitration would bring to a contract is vital to deciding whether arbitration would be beneficial for an agreement.  A non-exhaustive list of the benefits provided by arbitration includes:

  • Confidentiality: Arbitration is usually confidential, meaning that everything discussed will not be available to the public.  Litigation is all part of public records and can be accessed by the public.  This can be especially important for sensitive matters or in cases where there is reputation on the line.
  • Expertise: Because the parties can choose the arbitrator, compared to a randomly assigned judge, the parties may choose an arbitrator that has expertise in the subject matter of the case.  This can be a skilled employment lawyer for an employment dispute or an arbitrator from an organization like Arbitration Forums, which provides arbitration services for some insurance disputes.  This can be beneficial for the parties because a complicated matter can be made simpler by a decision-maker that already knows and understands the law.
  • Informal: Arbitration often leaves all of the formality of litigation in the courtroom.  The rules of evidence and the formal procedure that are present in litigation are often left out of arbitration, allowing the parties to present their case freely.  This can be incredibly beneficial for parties where much of the evidence they have would be particularly beneficial to their claim.  While knowing this is certainly more common after a dispute arises, if contemplating the disputes that could arise would possibly raise a lot of evidentiary issues, it would be beneficial to consider arbitration.
  • Quick: Litigation takes time, and courts are often behind.  This means that litigation can take many months or even years to be completed.  Arbitration, on the other hand, can move faster because it does not depend on finding time in a judge’s busy schedule.  On average, an arbitration lasts around six months from the time the dispute arises.  An arbitrator may set the date after being appointed, and awards are usually given shortly after the hearing.  Therefore, if speed would be important in disputes, it would be beneficial to consider arbitration.
  • Economical: Because arbitrations are usually faster than litigation, it can be less expensive for parties to use arbitration.  It cuts down on attorney’s fees and discovery costs that may build up as the case goes through the courts.  So if saving costs on lawyers and other issues, arbitration may be beneficial for a contract.
  • Final: Arbitration may only be appealed on very limited circumstances, typically having to do with a lack of neutrality or other issues with the arbitrator.  This further saves time and costs, as the decision rendered by the arbitrator will likely be final.
  • Cooperative: Arbitration allows the parties to respond to the arbitrator and the other party cooperatively and collaboratively if they choose, which can help preserve relationships between the parties. Because of this, many contracting parties will choose arbitration because it will allow them to move forward in the case of a dispute without the hostility and competitiveness that often comes from litigation.

Considering the benefits of arbitration may make it seem like arbitration should always be the best choice.  However, it is also important to consider the drawbacks that including an arbitration clause may place on the parties.  These drawbacks include:

  • Unappealable: Arbitration is often final and can only be appealed for limited circumstances having to do more with procedure than the decision.  Because of this, the parties are required to give up their right to appeal to participate in an arbitration.  This is not a decision that should be taken lightly, so it is important to consider the ramifications before including or signing an arbitration agreement.
  • Broad: Including a predispute arbitration agreement removes the ability of the parties to consider arbitration on a case-by-case basis.  If the variety of disputes that may arise from a contract is varied, it may be better to include a preference for arbitration with a case-by-case analysis.
  • Informal: Occasionally, the lack of rules of evidence and procedure may allow uncommon or evidence that would typically be excluded.  Binding parties to arbitration removes the ability of the parties to restrain evidence to that allowed in a court of law and may dramatically affect a case.
  • Expense: While arbitrators are usually not as expensive as litigation, arbitral fees can still be incredibly expensive, especially if the cost rests on individuals or small businesses.  This is especially true in low-stakes disputes, which may arise under a general contract.

What should be included in an arbitration clause?

If after weighing the pros and cons of arbitration, the parties decide that an arbitration agreement will be the best option, the parties should draft an arbitration agreement that the parties can sign between them.  While there is no standard arbitration agreement, there are some standard components of an arbitration agreement that are important to include.  These include:

  • Statement of Intent: The arbitration clause will usually include a statement that outlines the parties’ intent to submit “any and all” disputes to arbitration.  This will also outline whether or not the arbitration will be binding between the parties.
  • Scope: While the statement of intent usually says any and all disputes will be submitted to arbitration, it is also common for the agreement to limit the disputes submitted to arbitration to specific types of disputes.
  • Applicable Law: When a contract spans different states or countries, the parties may choose which law applies to the dispute in the arbitration and which law the arbitration will follow.
  • Appointment Process: The arbitration agreement will often outline who the arbitrator will be appointed.  This can be through listing a specific organization to appoint the arbitrator or by outlining how the parties will choose.
  • Procedural Rules: Finally, an arbitration agreement will usually choose a procedural guide to follow from an organization.  This is often dependent on the type of dispute or contract.

Conclusion

The inclusion of a predispute arbitration can be a wonderful addition to a contract.  It assures the parties that their disputes will be settled in this type of mechanism.  However, the parties must be fully aware of the types of disputes that may arise from a contract and the implications that arbitration may have on certain disputes.  Choosing a predispute arbitration agreement allows the parties to take full control over resolving their disputes and gives the parties a picture of conflict resolution that they can agree on.

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