Advantages of Arbitration Agreements in Commercial Transactions

July 29, 2021 by Howard Teplinsky

Oftentimes, private arbitration is the preferred method of resolving commercial disputes, including disputes with employees and customers. Because arbitration is a creature of contract—i.e., only parties that agree to resolve disputes by arbitration are required to do so—determining whether to include an arbitration clause in a contract requires careful consideration during the negotiation of a transaction.  Including an arbitration agreement in your contract is generally advantageous because:

1. The arbitrators are usually selected from a finite list of individuals, usually for their special expertise in a particular area.
2. Relaxed rules of pleading, discovery, and evidence generally make it easier, less time-consuming, and thus less expensive to present your case.
3. An arbitration can be scheduled, conducted, and concluded more quickly and conveniently than in court.
4. An arbitration can be privately held, without public scrutiny, and transcripts of sworn testimony or other proceedings are not made public except by agreement.
5. For defendants, there is usually less chance of a “runaway verdict” because a jury does not decide the case.
6. The arbitrator generally will focus on the merits of the case and will make a decision based upon a fair view of the totality of the evidence submitted, which means there is less chance of a harsh result based on a technicality or procedural fluke.

Because both sides theoretically can agree to arbitration at any time during the dispute, even after a lawsuit has been filed by one of the parties, what is the advantage to having an arbitration clause in your contract? The real advantage to having an agreement to arbitrate disputes prior to the time the disputes actually arise is the ability to force the other side to arbitration even if they do not want to go, or to force them to abide by a particular procedural rule.  Before you put that arbitration clause in the contract, however, you have to make a judgment call as to whether it is more likely than not that you will want to arbitrate, or force the other side to accept any particular rules or procedures for the arbitration. Even if you draft an airtight arbitration agreement or procedural rule, you should first think through what the ramifications would be if, when a dispute actually arises, you were to find yourself on the wrong end of your own arbitration clause.  Arbitration clauses in commercial contracts should not simply be boilerplate, but rather, should be tailored to your business, industry, or particular transaction.  Because many factors go into your decision to include an arbitration clause in your standard or specially negotiated contract, it is vital that you consult with an attorney who understands your business and the nature of possible disputes that may arise.

For more information regarding arbitrating commercial disputes and tailoring an arbitration clause to best meet your needs, please contact Howard L. Teplinsky at (312) 368-0100.