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What are the risks of an arbitration clause?

On Behalf of | Apr 21, 2020 | Business Law |

Many people make your business successful. Part of your success hinges on everyone holding up their end of the agreements you make together.

Part of drafting a contract is creating a plan for what each party will do if there is a dispute. Arbitration clauses are a popular way to privately resolve disputes and avoid litigation in the court system.  Arbitration may also reduce financial strain on your business, but not every dispute can be solved in arbitration.

These are some of the risks that can come with an arbitration clause.

The arbitrator may not follow the contract.

It is important to understand what arbitration means and the arbitrator’s obligation when deciding your case. While you may hope that the arbitrator will hold the other party to their obligations under the contract, that is not always the case.

The American Arbitration Association (AAA) has rules that give guidance to the arbitration process. But those rules don’t typically apply to how an arbitrator may rule. For example, Rule 43(a) states, “The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract.” If the arbitrator decides there is an alternate result that is more equitable than what is in the contract, the rules allow the arbitrator the latitude to make that decision.

Make sure the agreements on consistent and that you know where you have to arbitrate.

Whether you have multiple contracts to represent different deals or you have more than one version of an arbitration clause during negotiation, conflicting clauses could mean trouble. Make sure that the clauses are consistent and that all parties to a deal have the same clause. This would include where an arbitration will occur and what law will govern.

A few courts have heard cases where there were conflicting arbitration clauses. If the court rules that there is no valid arbitration clause because there is a conflict, you could be forced to resolve your dispute in court.

It is important to understand the risks that come with an arbitration clause, so you can be ready for any outcome.