The Benefits of Arbitration

Should you include an arbitration provision in a contract? If you include a contract clause requiring arbitration, then any disputes “arising under or relating to” the agreement will be arbitrated. This allows you to avoid a lawsuit and instead hire one or more arbitrators — professionals trained to evaluate disagreements — to rule on yours.

Arbitration is cheaper and faster than a lawsuit, so it’s usually a good idea to include this provision. But arbitration has some drawbacks. Unlike a court ruling, an arbitration decision cannot be appealed (that’s why it’s called “binding arbitration”) and can be set aside by a judge only if you can prove the arbitrator was biased or the ruling violated public policy. Also, arbitrators must be paid, and their fees may run into many thousands of dollars. Participants in arbitration usually hire attorneys, so if there is an attorney-fees provision in your contract — a clause that requires that the loser pay the winner’s fees — you may have to pay legal fees, too.

Richard Stim Author, Whoops I’m in Business: A Crash Course in Business Basics San Francisco