Agreeing to arbitration before a dispute: most signed contracts have predispute arbitration clauses. Businesses and companies have been implementing arbitration to resolve disputes outside traditional litigation. It creates a space for parties to resolve conflicts confidently and efficiently while still issuing binding decisions 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 pre-dispute arbitration clause and the vital characteristics and inclusions in a predispute arbitration agreement.
What is a Pre-dispute Arbitration Clause?
It is a clause, usually in part of a more significant contract, that outlines an agreement between the parties to submit any dispute arising from the contract to arbitration. This is called a predispute arbitration agreement because it happens before an actual dispute arises. It contemplates disputes that may occur 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, 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 in which the arbitration proceedings will take place, the rules that will apply to the dispute, and binding 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 they must 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?
The Arbitration process is voluntary, so the parties must agree to submit the dispute to arbitration. A predispute arbitration agreement allows the parties to avoid agreeing on arbitration after a dispute and potentially disrupts the relationship between the parties. It will enable the parties to plan for a time when their contractual relationship may not be as strong as it was in the beginning and provide 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 this Clause Always be Followed?
In the United States, contract arbitration clauses are often enforced unless they are unconscionable or signed under duress or fraud. A party that believes the arbitration agreement is improper may challenge enforcing the clause in a standard court. While different standards exist in different states and courts, some similarities might help one figure out an unenforceable arbitration agreement.
Unconscionable
An unconscionable arbitration agreement 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 little bargaining power. Substantive unconscionability is often found when the substance of the agreement, such as the choice of arbitrator, is so unfair that it is 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 duress, but a court usually looks at the challenging party’s position when the contract is signed and at the cause of their duress.
Fraud
Froud will render an arbitration agreement unenforceable when there is evidence that the agreement was fraudulent. This could be that one of the parties was told the agreement was something else, or the clause was added to the predispute arbitration 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. Without the above factors, courts see arbitration agreements as agreements that a party entered 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 predispute arbitration agreements, knowing that the courts can overturn them and would undermine their validity. Therefore, the United States continues to encourage the enforcement of arbitration agreements in the absence of the issues listed above.
Why Should Parties Choose Arbitration?
Arbitration provides various 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 of arbitration to a contract is vital to deciding whether arbitration would benefit an agreement. A non-exhaustive list of the benefits provided by arbitration includes:
Confidentiality
Arbitration is usually confidential, meaning 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 a reputation is on the line.
Expertise
Because the parties can choose the arbitrator, compared to a randomly assigned judge, the parties may choose an arbitrator with expertise in the case’s subject matter. 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. Arbitration forums can benefit the parties because a complicated matter can be made simpler by a decision-maker who 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 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 helpful to their claim. While knowing this is undoubtedly more common after a dispute, if contemplating the disputes that could arise would raise many 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. Arbitration, however, 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 when 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 necessary 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 costs are saved for lawyers and other issues, arbitration may benefit a contract.
Final
The arbitration may only be appealed in very limited circumstances, typically due to 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 cooperatively and collaboratively to the arbitrator and the other party, which can help preserve relationships between the parties. Many contracting parties choose arbitration because it allows them to move forward in a dispute without the hostility and competitiveness that often come from litigation.
Drawbacks of Arbitration
Considering the benefits of arbitration may make it seem like arbitration should always be the best choice. However, it is also essential 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 in limited circumstances involving procedure rather than the decision. Because of this, the parties must give up their right to appeal to participate in arbitration. This decision should not 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 arising 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 evidence that would typically be excluded. Binding parties to arbitration removes the ability of the parties to restrain evidence that is 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 costly, 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, they should draft an arbitration agreement that they can sign between them. While there is no standard arbitration agreement, some standard components of a predispute arbitration agreement are important to include. These include:
- Statement of Intent: The arbitration clause usually includes a statement outlining the parties’ intent to submit “any and all” disputes to arbitration and whether or not the arbitration will be binding.
- Scope: While the statement of intent usually says any disputes will be submitted to arbitration, it is 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 often outlines the arbitrator’s appointment. This can be done by listing a specific organization to appoint the arbitrator or by outlining how the parties will choose.
- Procedural Rules: Finally, an arbitration agreement usually chooses a procedural guide from an organization. This is often dependent on the type of dispute or contract.
Conclusion
Including a predispute arbitration can be an excellent addition to a contract. It assures the parties that their disputes will be settled using this 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.
To learn more about the purpose of a predispute arbitration clause, arbitration, conflict resolution, and more, contact ADR Times!
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