Arbitration Clauses in Contracts: Pros and Cons

by | Dec 22, 2014 | Firm News

Should you sign a contract with an arbitration clause?

When you sign a contract, like a lease, a loan, or a license to use a patent or trademark, including a franchise agreement, if it contains an arbitration clause, you are agreeing to arbitrate disputes, even though you do not know what the dispute might be about. You don’t know how much money is involved. You don’t know what impact it might have on your business. You don’t know how complicated the facts or the legal issues might be.

Arbitration is a good choice if you can afford to live with a decision against you, no matter how wrong the arbitrator is. There is no appeal from the decision of an arbitrator, no matter how wrong.

If the arbitrator could make a decision that requires you to pay the other side so much money that it will put you out of business or even into bankruptcy, do you really want to give away all the protections of a court? If the arbitrator’s decision could result in the cancellation of your lease, your license agreement, or your right to renew, that means you could lose your whole business and everything you have invested in it.

What are you giving up by agreeing to arbitration in advance, before a dispute has happened?

You are giving up the right to appeal the decision. Even in court, most appeals must be limited to errors regarding the law. If both sides put on evidence and the judge or jury decides one side’s evidence is stronger than the other’s, the court of appeal won’t reverse that decision. However, every case has lots and lots of legal issues, even issues about what evidence can and cannot be presented. There are lots of opportunities for mistakes and maybe to at least get the chance of a new trial.

You are giving up the right to have the case heard in front of an active professional judge. Many arbitrators are retired judges, supplementing their retirement pension. Many are retired from some other line of work and don’t even have training and experience as a judge. Many AAA arbitrators aren’t even lawyers. There is a lot of value in the training and experience of a real judge.

You are giving up the protections of the rules of evidence. They are there to make sure that only evidence that is important to the case get presented. If a lawyer doesn’t have enough good evidence, it is tempting to try to distract the judge or jury with issues that make the other side look bad, even if they don’t have anything to do with the case. The rules of evidence are designed to protect against such distractions. They are complicated and subtle. Even if the rules of evidence were applied, it takes a trained and experienced judge to get them right.

You are also giving up the constitutional right to a trial by jury. I have won and lost jury trials, and in every case, the jury got it right. A single judge might miss the significance of a piece of testimony or other evidence. He might find a particular witness more believable than anyone else would, or less believable In the jury room, the jurors go back and forth over all the evidence and which items each juror thinks is more important or less important, and which are more believable and less believable. That process tends to bring the truth to the top.

There are many disputes that should be decided by arbitration, but when the stakes are high and the issues are difficult, you will want the protections provided by a court trial. Many landlords, lenders and franchisors insist on arbitration. Often you won’t have a choice. If you do have a choice, think about offering to consider arbitration when the dispute happens, and putting off agreeing to arbitration until you know what the dispute is about.