Boilerplate that Bites: The Arbitration Clause

We had three arbitrators billing us at $500 per hour, and the case was going nowhere with no end in sight… at least in court the judge is paid for by the taxpayers

General Counsel, Fortune 500 company

Next time you’re skimming through the boilerplate, take a moment to ponder that standard form dispute resolution clause. And if it talks about arbitration, you may want to read about Arbitration’s Fall From Grace before you seal the deal.

It’s not that arbitration is all bad. But its usefulness and popularity seems to depend very much on the circumstances, and who you’re talking to.

Arbitration pros include:

  • it can be quicker, especially if the courts are clogged up, like they are in, say, California
  • it can be cheaper than heading off to court, although some argue that it is “penny wise, pound foolish”
  • it can better than landing in a court system that you consider, well, “dodgy”
  • some arbitrators bring special skills to the table that judges may lack, for example, engineering skills

But there are also a few cons:

  • if one side challenges the arbitration clause, you might end up in court anyway
  • you can’t appeal if you don’t like the outcome
  • as one GC put it, “most arbitrators are not as good as most judges”
  • mediation is better

Despite the criticisms, the number of arbitration cases in the US doubled between 1997 and 2004 (to just under 160,000 cases, based on AAA figures), although this growth appears to have stalled in the last couple of years.

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