Arbitration clauses - pros and cons for small businesses
Often times, business owners only hear the potential “up-sides” of arbitration clauses. They are told that an arbitration clause will reduce their risk of a large damage award from a jury, and that arbitration is less expensive than going to Court. The business owner, excited about the possibility of reducing risk, agrees to include the arbitration clause in the contract.
But small business owners are rarely informed of the “down-side” risks of an arbitration clause. There is always the possibility of getting a biased arbitrator, particularly in smaller towns and counties.
Arbitration is expensive. One of our small business clients found this out when he had to spend several thousand dollars just for the right to have an arbitrator assigned to his business’ claim. He found another way to handle the dispute before he learned of the attorney fees and arbitration fees associated with taken an issue to an arbitrator.
More than a few arbitrators are not attorneys, and it is not uncommon to run into an arbitrator who doesn’t know or understand the law that governs a particular dispute. In the event of an adverse arbitration decision, there is extreme risk that a Court cannot or will not reverse (or reduce) excessive damage awards.
When two parties don’t negotiate the arbitration clause at “arms-length”, there is always the risk that one of the parties will find a way out of the clause and you could end up litigating your case in Court anyway.
Finally, it’s been my experience that most arbitrators try to “split-the-baby†or find “win-win” solutions; these types of outcomes are almost always “lose-lose” for small business owners.
I’m not bashing arbitration or arbitrators: there is a time and place for their skills and services. However, our Constitutions (Federal and State) created the Judiciary for a reason; except in rare circumstances, only an independent judiciary can best provide a prompt and proper redress for a wrong or injury.
Unless you have a specific and informed reason for choosing to include an arbitration clause in your contract, it’s almost always better to present your dispute to an informed, educated and experienced judge. At the very least, our State judges here in Texas are answerable for their decisions come election time, and our Federal Judges are bound to 230 years of law and precedent.
If you want to explore whether or not to include an arbitration agreement in one of your contracts, or if you want to discuss whether arbitration is a good solution for your business, contact the Attig Law Firm for a candid analysis.
