Monday, September 29, 2008

Arbitration Clauses: An Insurance Policy Against Emotional Adversaries

We regularly advise our corporate clients to avoid litigation at all costs. A trial requires an immense amount of management’s time, it is a big distraction from operations, and business frequently suffers. Add in the additional cost for litigation attorneys, it’s no secret that the lawyers are often the prevailing parties.

Sometimes legal disputes are unavoidable and in these situations we advise our clients to reach a settlement as quickly as possible, even if it means walking away from some money or taking a hit to their ego. It enables management to move on to positive endeavors and, in the long run, is better for business.

Occasionally, however, you’ll have an adversary who refuses to negotiate a reasonable settlement despite the financial burden on them to continue with a lawsuit. These litigants are often very emotional about a claim, or are foolishly clinging to “principal” to make a point. Litigation attorneys love clients like this, especially if they have deep pockets to continue paying the firm’s bills. We frequently see this situation in partnership disputes where there’s been an emotional falling out between partners.

By adding arbitration clauses in all your contracts, you have an insurance policy against the emotional adversary. In an arbitration clause, both parties agree to submit any claim that cannot be settled to an arbitration panel in lieu of going to court. Courts strictly enforce contracting parties’ agreement to arbitrate claims and will hardly ever permit a claim to proceed in court where both parties have agreed to arbitrate in a contract. An arbitration panel’s decision after a hearing is then final and binding on both parties.

Unlike litigation that can drag on for years, arbitration is much less formal than a trial and takes significantly less time to reach a final resolution. In the end, litigation costs are significantly less burdensome. Some critics of arbitration claim that panels’ decisions can be unpredictable, which can be true. Further, often in contract disputes there are no clear winners or losers—the panel seeks a remedy that is most fair to both parties. Notwithstanding, for most businesses, arbitrating disputes that can’t be settled makes the most sense.

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