Q: Our small company is overhauling all of our standard contracts that we use with distributors, vendors and customers. Should we include mandatory arbitration clauses in our contracts to avoid the cost of litigation when we have legal disputes?
A: It depends on what you are hoping to achieve by way of an arbitration clause. Many business owners are under the impression that arbitration provides a quicker, more efficient and cheaper method than litigation to resolve business disputes. Although that may be true in many cases, it certainly is not true in all cases, and quite often arbitration can now be considerably more expensive than litigation.
The filing fee and administrative costs typically are higher than the associated filing and administrative costs for bringing a lawsuit in court. Furthermore, arbitrators usually are lawyers or retired judges, so in addition to incurring attorneys’ fees to pay your own lawyer, you will also need to split the fees of the arbitrator with the opposing party, and those fees can be considerable if the arbitration extends over multiple days. Thus, costs alone may not weigh in arbitration’s favor over litigation.
Another concern for you may be the speed in which disputes can be resolved. Despite dockets becoming backed up during the pandemic, our federal and state courts in New Hampshire are quite efficient in processing cases through congested dockets, so cases move through New Hampshire courts much quicker than in many other states. That being said, if both parties to an arbitration are aligned in their desire to have the arbitration process proceed as quickly as possible, arbitration may well allow for a quicker resolution because arbitrators have more flexibility to adapt to the requests of the parties. That is not always the case, however, if the dispute is going to require significant discovery before resolution. If so, arbitration may take as long as litigation in a court.
One principal reason many businesses will opt for arbitration is because it provides a private forum where the parties do not have to air their dispute in the public courtroom, and that may trump the other factors for some businesses. Others prefer traditional litigation because there are greater options to appeal an unfavorable decision by a lower court. In sum, whether to include an arbitration clause will depend on your particular circumstances, and there are many factors you should discuss with your counsel.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.