Play 6: Arbitration Clauses

Welcome back to another week of the Small Business Legal Playbook! Play 6 is titled “Arbitration.” In some sports, arbitration means that the players and the teams agree ahead of time to allow a neutral third party to decide on the merits of the case, and they agree to be bound by the results. In the NFL, if a player disagrees with the league, they can ask for an arbitrator to hear their case and rule accordingly. The same thing applies here, all the parties involved agree to using an arbitrator rather than the court system to resolve their disputes related to the contract.

If you’ve ever signed a contract on behalf of your small business, you’re familiar with the boiler-plate language towards the end that says your business is agreeing to binding arbitration and waiving its right to have its day in court. But chances are that you haven’t thought too hard about making sure arbitration clauses are in the contracts that YOUR BUSINESS provides YOUR clients as well.

So why would you put an arbitration clause in your small business’ contracts? First off, it makes the costs more manageable if you want to make a contractual dispute official compared to taking things to court the old-fashioned way. Second, it makes the process go much more quickly when the parties are forced to arbitrate first. The California court system has suffered through some tremendous budget cuts and is currently incredibly backlogged. Arbitration makes a much more appealing option where the parties can reach a resolution in months, sometimes even years, before they would be able to do so if they went through the regular court system.

So, let’s discuss our offensive strategies for arbitration clauses in your small business’ contracts. First, make sure that an arbitration clause is in the contracts that your business provides your clients, customers and even vendors. You want to be explicitly clear that the contract is subject to binding arbitration, and say WHEN and WHERE that arbitration can take place, and HOW the arbitrator may be chosen. There is no room for vague generalities, be explicit, because the point of having an arbitration clause is for it to be loop-hole free. Binding arbitration means the parties agree to be bound by the results. Non-binding arbitration is a waste of time, as even if an arbitrator rules in your favor, it has no value and now you must file a lawsuit against them. So, it doesn’t save you money and it doesn’t save you time, any form of arbitration that isn’t binding is better off being left out of the contract. Make sure it’s clear where arbitration can take place and how the arbitrator must be selected so the other party can’t cry foul about those items as well.

Defensive strategies? If you’ve got an arbitration clause in an existing contract and would rather litigate, look for loop-holes that suggest that arbitration is only an option, not a requirement. If you’d rather go to arbitration and there isn’t an arbitration clause, try and convince the other side that arbitration will save everyone money. Everyone loves saving money, except for the lawyers. If you’re faced with a non-binding arbitration clause, that’s not mandatory? Skip arbitration and go right to court, or consider asking the other party to agree to make the arbitration binding. If they won’t agree to make the arbitration binding, it’s not in your best interests to subject yourselves to an arbitration which probably won’t resolve the dispute. While arbitration can be riskier than court (as it usually does not include an option to appeal), and sometimes worries my clients, if you’re dead-set on keeping costs down for your small business, binding arbitration clauses in your contracts is a no-brainer.

That’s all for this week. I hope you enjoyed this week’s Play, and stay tuned for next week’s play from the Small Business Legal Playbook! Remember to subscribe and get each play sent to you directly! Until then, may your businesses continue to thrive and your football teams be victorious. Keep playing to win!

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Play 6: Arbitration Clauses
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Discuss our offensive and defensive strategies for arbitration clauses to know why you should put an arbitration clause in your small business’ contracts!
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