Arbitration clauses: are they really a good idea for small business contracts?
The Attig Law Firm will rarely recommend including an arbitration clause in a contract. This type of clause, where the contracting parties willingly give up their right to go to Court and instead resolve their dispute before an arbitrator, usually make good business sense only when both parties make a knowing and informed agreement to arbitrate a future dispute. Otherwise, arbitration clauses are disasters waiting to happen.
Take the plight of Perry Homes. In 1996, they agreed to build a $250,000 home for a Texas couple; the couple then alleged that the home was a lemon. In 2000, they brought suit against Perry Homes seeking the cost of repairs to the home. Because Perry Homes included an arbitration clause in their contract, the Court ordered the parties to comply with the contract and submit the dispute to arbitration. In 2002, the arbitrator decided against the homebuilder - to the tune of $800,000 (including punitive damages, actual damages and attorney fees).
For 5 years, Perry Homes has been trying to have the decision of the arbitrator overturned by Texas Courts - not surprisingly, they claim that the arbitrator was biased against the builder. Over those 5 years, the damage award has grown to $1.3 million dollars, including interest.
The great irony is that Bob Perry, owner of Perry Homes, has for years donated millions of dollars to politicians and lobbyists to make sure that arbitration agreements are upheld. Now, he is spending tens, possibly hundreds of thousands of dollars to his lawyers to get the Court to undo everything he has created. A lesson we can take from the plight of Perry Homes is this: arbitration clauses are only useful if the parties are bargaining at “arms-length” and both parties make an informed and knowing decision to waive their right to resolve a dispute in court.
