🔒The pros and cons of arbitration agreements

While most business transactions never come to a dispute, and many of the ones that do will be resolved by good faith discussion between the parties, it is not unusual to have agreements define how a future dispute will be resolved.

Many business owners and consumers are frequently presented with the option to use arbitration to resolve future disputes or claims that may arise in new relationships.

Arbitration clauses appear in many forms of agreements, from hand-crafted contracts specifically drawn for a new project or venture to the simplest of agreement/forms where little, if any, thought is given to what will happen when things go wrong.

For this reason, it is best for parties to an agreement or relationship to consider in advance how bad outcomes will be handled, and that may include the use of arbitration clauses.

When you are presented with such clauses, it is always appropriate to consider how the proposed dispute resolution mechanism will work under certain circumstances.

Here are some guidelines to keep in mind next time you are presented with this choice.

1. Arbitration agreements are enforceable when written or electronic under both federal and Connecticut law. Once you sign such an agreement you will be bound by its terms and conditions, regardless of whether you read such agreement.

2. Arbitration is not for everyone or every dispute. The commonly-held belief is that arbitration will be faster and less expensive than litigation.

While that is sometimes the case, do not assume it always will be. Court systems move at different paces, from fast-moving small claims courts to complex jury trials.

Despite best intentions, arbitrations can get bogged down for a variety of reasons. In court, the person filing suit will incur expenses at the outset up to several hundred dollars. You then will be assigned a judge, or series of judges, who are typically neutral and experienced, but whose expertise is unknown.

Arbitration fees are not insignificant and often run into thousands of dollars. Before signing an arbitration clause, you should inspect the fees and expenses charged by any proposed arbitration forum. Panels, which require multiple members or neutrals, can multiply expenses quickly.

3. Does the arbitration clause require you to travel to a specific forum or location for hearings or resolution? A remedy that costs more than the amount in dispute is simply not effective.

4. Is the proposed panel truly neutral? If the proposed panel is linked to an industry or association, it may not be as neutral as you would like.

5. One important benefit to arbitration is that the parties can select a particular arbitrator in advance or designate selection from a panel most likely to ensure neutrality or expertise in a given area of science or industry.

When both sides are working in the same industry, choosing an industry-related panel makes sense. If you are not part of that industry, however, you may start to feel left out.

If neutrality is a concern, some arbitration forums — for example, the American Arbitration Association — offer panels consisting of retired judges from state or federal courts.

Panelists with substantial judicial experience are less likely to be swayed by sentiment and have learned to remain focused on the important legal and factual issues.

Likewise, a person with years of expertise in an area of knowledge, and respected by both sides, can be designated before any dispute arises.

The bottom line is to never simply assume an arbitration clause is the best solution. Consider what kinds of disputes might arise in the business transaction and whether the proposed arbitration will be the best way to resolve them.

William J. Wenzel is a retired Connecticut Superior Court Judge and member of the alternative dispute resolution, family law and litigation practices at Pullman & Comley.