For years now, businesses have looked for cost-efficient ways to resolve disputes. Chief among them has been arbitration. Touted initially as a panacea, arbitration clauses were inserted into agreements as a means to avoid costly and protracted litigation. In many cases, arbitration proved to be a fast and relatively inexpensive solution. Parties presented their positions before a neutral arbitrator in a relatively informal setting, avoiding not only the court system but also (at least theoretically) the expensive discovery process that accompanies most lawsuits.

Very quickly, however, the dark side of arbitration manifested itself, especially in more complicated cases. Depositions, subpoenas, document production and other discovery mechanisms that are so prevalent in lawsuits began to emerge in arbitration, not only increasing the cost but also lengthening the process. As arbitration grew into its own industry, the fees for both the arbitrators and the process itself began to mushroom. While it may take only a few hundred dollars to file a lawsuit, it can cost many thousands of dollars in fees to bring an arbitration proceeding, depending on the amount being claimed as damages. Unlike a traditional court proceeding, where judges are compensated by the state, parties in arbitration pay the arbitrators out of their own pockets. As a result, the cost of a hearing can quickly become very expensive, especially if you choose to work with a three-member panel. Arbitrators today charge either by the day or by the hour, which can even exceed attorney fees in some instances.

With arbitration, you also give up the right of appeal. While this is intended to reduce costs and streamline the resolution process, the trade-off is not always beneficial, especially when arbitration becomes more like traditional litigation both in time and expense.

None of this, however, means that arbitration is a bad thing. Far from it. Under the right circumstances, it can still be a very valuable tool. But before you add an arbitration clause to your next contract, carefully evaluate whether it is the best option for that particular case. If you determine that it is, don't simply insert a boilerplate arbitration clause. Instead, make sure you and your attorney discuss exactly what you want to arbitrate and how you want the process to be conducted, rather than leaving it to the whims of the arbitrators. For example, you have the right to specify how much discovery can take place. If you want to streamline the process, you can set forth procedures to accomplish that goal. Similarly, before you decide on a three-member panel, consider the associated costs. Remember, although you might be able to recover your costs if you prevail, you pay for the judges in arbitration.

Finally, it may be a good idea to review all of your existing form contracts that include boilerplate arbitration clauses. Decide if you want to retain that language, and if you do, consider whether the clauses should be modified in some way. You might also consider adding provisions that mandate mediation in addition to arbitration. Mediation can be extremely effective even though its success depends on the parties’ voluntary agreement and thus does not necessarily resolve the dispute in every case.

Remember that arbitration is one of many possible solutions. Although it can be a very important and valuable tool, it might not always be the right choice in today's rapidly changing business world. If you need help deciding whether arbitration or some other form of dispute resolution is the best option for your particular circumstances, contact your Much Shelist attorney.