Should I Include An Arbitration Clause In My Contracts?
I prepare many contracts, and one reoccurring question my clients have is about the arbitration clause. An arbitration clause essentially states that if there is any dispute among the parties, they will go to arbitration instead of suing one another. The question is: should your contract have one? The answer is: maybe.
You should always have a clause that sets out how the parties will resolve their differences if there is a breakdown. You can have a litigation clause that sets out which state laws control and where the venue will be for lawsuits. Or you can have an arbitration clause that states the parties will go to arbitration or mediation (instead of litigation).
The reason people choose an arbitration clause is cost. Arbitration can be less expensive than litigation. But once you have that clause in there, you are bound by it.
Litigation is more expensive, but sometimes there are advantages. People are more intimidated with litigation over arbitration and, therefore, more willing to negotiate. You can sometimes get an attachment and lien the property of the other party. Sometimes the amount is so small that the case is best served in small claims.
There is also mediation, which is useful because it is less formal, less expensive, and you can get before a mediator quickly. The downside is that it is non-binding. If the other side does not like the mediator’s decision, you are now back at the beginning.
Fortunately, it is your contract, and you can put in what you want, including a hybrid of all three. And you can even put in language that all mediation/arbitration must be done virtually, saving travel time for the parties. The important part is to determine what works best for you and include that language in the contract.
If you have a question about mediation/arbitration/litigation clauses in contracts, reach out, and I can assist.