Contract Negotiation Tip 001 | Beware of Arbitration Clauses

Arbitration Clauses in business contracts sound like a great thing on paper. If there’s a dispute, the parties can go before a third-party decision maker and have the matter decided quickly and less expensively than in court. The dispute also remains confidential. While these contract clauses may sound favorable, the truth is they are not included in contracts to protect you in the event of a dispute.

If you don’t strike the provision during negotiation you’re giving up your day in court. You’re essentially agreeing that someone belonging to an institution pre-selected by the other party will decide any future dispute. That someone is not a sitting judge and may be a lawyer belonging to an arbitration association aligned with the industry you’re fighting. Plus, the decision maker is not required to follow the law and the lack of procedural and evidentiary rules make it a legal crapshoot.  What more, the fine print may put the place of arbitration thousands of miles away from your place of business and next door to the other party’s corporate headquarters.  And as a bonus, if you don’t like the decision, you’ve given up your right to appeal.

Americans cherish the right to determine one’s own destinies. This value is reflected in our contract law. Businesses are free to waive their rights to judicial process and agree to be bound by alternative privatized tribunals. But why would any business knowingly give up their only leverage if push comes to shove?

The absence of an arbitration clause does not mean the parties cannot agree to resolve their dispute through an alternative process such as arbitration or mediation. The parties can stipulate, at any time, to avoid court and submit the matter to a mutually acceptable arbitrator or go before a mediator.

Next time you, or your business, is offered a contract with a mandatory arbitration clause, remember your probably better off without the provision. If the other party insists on keeping the clause, try to replace any designated arbitrator and association with language allowing the parties, in the event of a dispute, to select a “mutually acceptable arbitrator” affiliated with a “mutually acceptable alternative dispute association.”   Also get rid of any inconvenient locations for arbitration.   

While arbitration clauses may sound like a great way of resolving disputes, businesses beware. Arbitration clauses are generally included in contracts in the hope that the signing party will unwittingly surrender their right to have their day in court.


Kevin Walsh

Lead Attorney & Owner

1Source Law LLC



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