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Should businesses include arbitration clauses in their contracts?

| Mar 12, 2021 | Firm News

Contracts are at the heart of every business transaction, from hiring a cleaning company to acquiring a competing business. While some of the terms are obvious, the benefits of other clauses may be dubious.

Arbitration clauses have the potential to be either good or bad, depending on the circumstances, so businesses may do well to include them on a case-by-case basis.

The benefits of arbitration

According to the Houston Chronicle, one of the primary benefits of arbitration is that it keeps the company out of the courtroom. Lawsuits are rarely good for business, even when they are frivolous or unfounded. Litigation is also expensive and time-consuming, while an arbitration case may take a few months at a fraction of the cost.

While a judge is an expert in the law, the arbitrator may be an expert in the technical or business matter that needs resolution. If the contract in question includes many product, business or technical details, it may be a good idea to have an expert determine the outcome. Plus, arbitration keeps sensitive business matters such as trade secrets private, while the court record is public.

The disadvantages of arbitration

Unlike a court case, the final ruling of the arbitrator is actually final. Neither side can appeal the decision, although uncovering proof of an arbitrator’s unethical behavior such as accepting a bribe may open the matter back up to dispute.

Some companies choose to include an alternative dispute resolution clause in contracts that requires the parties to attempt mediation before arbitration. While mediation is not legally binding, the goal is to resolve the dispute rather than choose a winner, which means both sides win.