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Arbitration Clauses, a Dangerous Contract Term?

For most small business’s entering into contracts with vendors and clients is a very regular and necessary practice. Although, with so many contracts that are signed are you aware of what every term in every contract you signed means? To make your contract review easier, it is important to be aware of some of the common dangerous contract terms. Today, we will discussing one of the most infamous and dangerous contract terms, the Arbitration Clause.

Arbitration is a form of alternative dispute resolution, is a way to resolve disputes outside the courts. The dispute will be decided by one or more persons, the arbitrator, which renders the “arbitration award”. An arbitration award is legally binding on both sides and enforceable in the courts. An Arbitration clause is a term in a contract that requires the parties to the contract to resolve their disputes through an arbitration process. Arbitrators are usually form attorneys or judges. The most famous Arbitrator that almost everyone is familiar with is Judge Judy. The arbitration process is generally thought of as favoring the writer of the contract, and arbitrators are generally more conservative than the average judge.

Arbitrators are more likely to hold a party to the terms of a contract regardless of whether the contract is facially unfair to one side. The benefits of arbitration to both sides are that it is a less formal process and as a result is generally much quicker. Although, that is only the true when regular litigation makes it beyond the discovery phase, but most cases settle before this point. One of the biggest cons of Arbitration, is the restricted discovery process. Some arbitration agreements even completely eliminate the discovery process. This can make it much more difficult to get witnesses to show up to arbitration, and depositions are not usually available either. Some arbitration clauses even restrict arbitration to a telephonic proceeding.

When your the party who made a contract, arbitration will usually be in your favor, as you have “Home court” advantage so to speak. With arbitration you also may benefit or suffer from a greater limit to the subpoena power in discovery (ability to request information and testimony). In arbitration 3rd parties are far less likely to comply with discovery requests, making it particularly difficult for opposing parties to find critical information they need.

Arbitration Clauses are becoming more and more common. Lately, we have seen arbitration clauses in almost every contract with major vendors, in browsewrap agreements, and commercial leases. Small businesses are likely entering into many more contracts with arbitration agreements than they would think. Dangerous clauses like this are way it is so important to have an attorney review proposed contracts. Of course, this clause is a double edged sword, and one you might also want to add to your customer service agreements.

Here at The Weil Law Group, PA our small business subscription comes with a half hour of free contract review or legal advice a month. We also do individual contract reviews for an affordable price. If you have any questions or need any help call 954-603-7603. The Weil Law Group, PA is here to help.


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