Don't Bet the Business

Companies of every size include binding arbitration clauses in their contracts.

The typical arbitration clause states that any dispute arising under the contract will not be addressed in a court of law, but through the less formal process of arbitration. Often, arbitration is perceived as a cheaper, quicker and more private method of dispute adjudication.

But arbitration is not a “one size fits all” solution. And the three presumptions above are worth closer examination.

A Cheaper Option to Litigation

Arbitration clauses are ubiquitous because of the presumption that this dispute resolution option is cheaper than litigation in court. That’s not often true. In many commercial disputes, arbitration makes a dispute more expensive, not less. Here’s an illustration:

Let’s say a wholesaler has a standard client contract with an arbitration clause. That clause provides that any dispute regarding the performance of the contract be brought through the American Arbitration Association (AAA) and litigated subject to its Commercial Rules.

One of the wholesaler’s customers places a large purchase order for $600,000 of goods and fails to pay. After informal attempts to collect fail, the wholesaler initiates arbitration through the AAA.

As of this writing, the initial filing fee to bring a commercial case before the AAA for the amount at issue is $6,650. The AAA also requires that the arbitrator’s fees are paid by the litigants and sometimes assesses additional fees as the case proceeds to adjudication.

It should be noted that the AAA is not unique in this respect, and its inclusion herein is strictly for illustrative purposes. Other arbitration and dispute resolution groups have similar fee schedules and structures.

Conversely, as of this writing, the cost to bring suit in the Northern District of Illinois is $405, and parties in traditional lawsuits do not pay for the judge’s services. As such, arbitration is rarely the cheaper option.

A Quicker Discovery Process

For many litigants, the unavailability of third-party discovery in arbitration is a welcome fact. Under applicable law, arbitrators cannot order discovery responses from non-cooperating 3^rd parties. Matria Healthcare, LLC v. Duthie, 584 F. Supp. 2d 1078, 1080 (N.D. Ill. 2008).

This means no enforceable subpoenas for documents to non-parties and no non-party depositions. This limitation shrinks the scope of traditional discovery significantly and, therefore, limits discovery costs and litigation disputes over discoverable material. As a result, discovery in arbitration can move faster than traditional litigation.

Private Dispute Resolution

For parties valuing their privacy during legal disputes, arbitration is extremely attractive. Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689, 693 (7th Cir. 2020) (“Contractual arbitration is private dispute resolution.”).

However, that does not mean that an arbitrator’s decision will never become public knowledge because there are limited circumstances under which a trial court can review and vacate an arbitration award. See e.g. Herricane Graphics, Inc. v. Blinderman Const. Co., Inc., 354 Ill. App. 3d 151, 156 (2d Dist. 2004) (“Although a court cannot vacate an award due to errors in judgment or mistakes of fact or law, a court can vacate an arbitration award where a gross error of law or fact appears on the award's face, or where the award fails to dispose of all matters properly submitted to the arbitrator.”).

Regardless, arbitration offers a far more private setting to litigate sensitive topics, and companies with public disclosure concerns often prefer arbitration.

You Make the Call

So, does an arbitration clause belong in your company’s contracts?

That primarily depends on the company’s litigation needs, privacy concerns, nature of the contract, necessity of non-party discovery and other factors.

Consulting an attorney can help you decide whether including an arbitration clause in your business agreements is the best option for your commercial contract needs.