Are Arbitration Clauses Right For Your Small Business?

business contract lawyer Long IslandWhen contracting on behalf of your small business, it is important to identify whether you would like to include an arbitration clause. Many small business contracts include arbitration clauses that mandate all disputes arising out of the claim to be brought in arbitration rather than litigated in court.  Before entering into a contract including an arbitration clause, or including one in a contract of your own, it is important to gain an understanding of the process.


Before you enter into any contract, you should understand the difference between arbitration and litigation in court.  When a party breaches a contract, you may think the only option is to take them to court in one of the various courts of New York State.  However, arbitration offers an alternative.  Arbitration is an alternative dispute resolution process whereby the parties agree to refer their dispute to an arbitrator, by whose decision they agree to be bound.  Many times, the arbitrators are part of a larger association such as the American Arbitration Association (AAA) or the National Arbitration and Mediation (NAM).


Before agreeing to arbitrate a dispute, there are several important considerations.  One of the primary considerations is the cost of arbitration.  When filing a case in a court, the typical filing fee is $210.  In many situations, the $210 may be the only cost in order to get the negotiations going.  On the contrary, when filing in arbitration, there are arbitration association fees that must be paid, according to the association’s fee structure.  If your dispute is over a small sum, the arbitration fees can outweigh the benefits.  With that being said, if the litigation in court drags on for a while, the cost of discovery can be substantial.  In the case of arbitration, an arbitrator may be able to limit these expenses by limiting discovery and motion practice.


Another consideration when deciding between arbitration and litigation is whether you are comfortable with a decision being made public.  When you file a claim with the court, the filings become a matter of public record. Therefore, anyone with a knowledge of the court system can usually gain access to your filings. Additionally, any individual can show up in a public courtroom to observe the trial. Conversely, with arbitration, the entire process is frequently confidential.


The final, and possibly most important, consideration is the ability to appeal.  In court, there is a structure by which you may appeal the decision by the lower court judge.  In the case of an arbitration, the parties agree to be bound by the decision of the arbitrator.  Therefore, there is often no appeal.  Additionally, the lower courts are bound by the decisions of the higher courts. In the case of arbitration, the arbitrators are simply bound by the principles of equity and fairness.  While the arbitrators will often rely on case law when making their decisions, they do not have the same constraints, which can make their decision somewhat unpredictable.


When deciding whether you should sign or draft a contract with an arbitration agreement, you should contact an attorney who is experienced in all facets of business law. The attorneys at Blodnick, Fazio & Clark are skilled and knowledgeable in the areas of business law and commercial transactions. If you require legal assistance concerning business startups, formation, corporate acquisitions and mergers, corporate restructuring, or another business matter, call our Nassau County business lawyers at (516) 280-7105,  or, for our Suffolk County business lawyers, call (631) 669-6300.

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