Beware the Cost of Arbitration

Do you have a contract with an employee, client, or other company?  Take a look through that contract and see if there are terms similar to these:

“If any controversy or claim arising directly or indirectly out of, connected with, or relating to the interpretation of this agreement, or any other matter involving any act or omission performed under this Agreement, or promises, representations or negotiations concerning the duties of either party shall be submitted for private arbitration for resolution in accordance with the arbitration company’s rules.  The judgment of any award may be entered in any court having jurisdiction, and the arbitration opinion shall be binding on all parties?”

If so, you have an arbitration agreement and any dispute arising out of your contract has to be submitted to a company that handles arbitrations; there are many out there. 

But aren’t arbitrations easier?  Won’t they take less time?  While the answers to both of these questions are yes, the real cost of arbitration is the out of pocket expenses that arise for the administration of the claim.  These expenses can add up very quickly and can sometimes cost more than the award being sought.      

For example, I once had a case where an employer had employment agreements that contained arbitration clauses.  These clauses required any dispute arising out of the contract to be submitted for private arbitration, to be heard by three arbitrators.  Some of the employees brought claims against the employer totaling $20,000.  Based on the rules of the private arbitration company, after the employees paid their filing fees, all expenses were borne by the employer.  This meant the employer had to pay all the administrative fees as well as the cost of the three arbitrators, who each could charge hundreds of dollars per hour.  Based on my calculations, the case would have taken at least two days and did not include the preparation time which the arbitrators require and for which they charge.  This case eventually settled prior to reaching a hearing but the employer was caught between a rock and a hard place.  Had the employer gone to arbitration and won, the employer would have had already paid close to, if not more than, the $20,000 claimed in fees and costs, just for the right to possibly prevail at arbitration.  On the other hand, the employers, who only had to pay a filing fee, had nothing to lose and everything to gain by proceeding with the case.

What is the real lesson to be learned from the above example?  Be careful when and how you use arbitration agreements in contracts.  Is the ease and time saved worth the cost of the fees that need to be paid to the arbitration association and the arbitrator(s)?  That is something that every company should discuss among business partners and its attorney prior to including an arbitration agreement in a contract.

One final thought: we have a judicial system that exists, for which we already pay the administrative costs, and while the process of reaching a resolution may take longer in certain situations, sometimes that time can outweigh the costs of arbitration.