Arbitration and Arbitration Clauses in Contracts -- Overview

Many of my more sophisticated clients, for whom I draw contracts, commonly ask if we should put in a provision to require "Binding Arbitration" in the event of a legal dispute.

The idea, in theory, is a good one. Arbitration, it is said, will reduce the legal costs otherwise incurred in court; will produce fairer results less dependent on technicalities and based more on the merits and equities; and will resolve matters more quickly.

I'd sat on the sidelines for a long time and advised against them, primarily from cases I had watched and from my own personal convictions that I was able to use the mechanics of the legal system to obtain a more favorable result for most of my clients.

However, I finally got the benefit of putting Arbitration to the test, recently, when a client of mine got into a dispute with a large commercial contractor over several projects. Each project was governed by a separate contract, each of which provided for binding arbitration in the event of a dispute, and the contractor, pursuant to his rights, demanded binding arbitration. Because the contractor's attorney was a litigator who specialized in construction litigation, and because I did not want my first experience in arbitration to be against an experienced specialist when hundreds of thousands of dollars were on the line, I associated a colleage of mine who was also a construction litigation specialist.

Through the process, I got the opportunity to watch how binding arbitration worked, to see its advantages and disadvantages in action, and now feel more qualified than before to speak about arbitration.

First, my opinion: putting binding arbitration clauses in contracts is still, in my opinion, a bad idea. Arbitration, in my experience, does not adequately deliver on its promised benefits (costs and fairness), while subjecting its participants to a procedure and to rulings that are only loosely bound by a rule of law and, for the most part, are non-appealable.

Next, in the upcoming articles, I will discuss the structure of binding arbitration, its alleged benefits and its drawbacks, and allow the reader to draw his own conclusions. Stay tuned....