By Jones Osborn II

The parties to a contract often include an "arbitration clause" in their agreement. This is an agreement to arbitrate any disputes they may have under the contract rather than to resolve them by a lawsuit in a court of law. The reason the parties choose arbitration usually is because they believe it will be quicker and less expensive. In fact, arbitration is usually quicker and less expensive than litigation in a court of law; unfortunately, it's rarely as quick or as inexpensive as the parties had hoped. Often it costs almost as much to arbitrate a dispute as it does to go to court. Parties to arbitration proceedings generally retain legal counsel to assist them in their presentation, and these counsel prepare just as thoroughly for arbitration as they do for trial.

Other Considerations. There are other factors besides speed and expense that the parties should keep in mind when deciding whether to include an arbitration clause in their agreement.

The most important consideration is that with arbitration the proceeding is less likely to be based on a strict application of the law. Arbitrators are rarely judges or lawyers, and while they are supposed to follow prevailing law they sometimes are not aware of what the law is or how it applies to the particular case. It is also believed that arbitrators are more likely to "split the baby" than a court of law -- that is, to fashion a compromise solution (regardless of the law) rather than to decide in favor of one party or another. Whether you, as a party to a contract, find this approach to your advantage or disadvantage will depend on the complexity of the contract, the kinds of disputes that are likely to arise, and whether you would like your dispute determined strictly in accordance with the law or in accordance with your arbitrator's idea of fairness, justice, and compromise.

No Discovery. Another consideration is that there is usually no discovery (such as the taking of depositions and the required disclosure of documents and other evidence) and few, if any, pre-trial motions. On the one hand, this can save time and money because these procedures are expensive and time-consuming. On the other hand, not having these procedures available can actually increase the cost and lead to aberrational results. This is because pre-trial motions often lead to the resolution of a case before it is necessary to conduct a full trial, and because pre-trial discovery narrows the issues for trial, promotes settlement by informing each party of the merits of the other party's case and the weaknesses of their own, and leads to generally fairer decisions because the possibility of surprise at trial is reduced. Clearly, the lack of discovery and pre-trial motions is both an advantage and disadvantage. Generally, the more complex the case, the more useful pre-trial discovery and motions become.

No Appeal. The grounds for appeal from an arbitrator's decision are very limited. The arbitrator is the judge of both the law and the facts, and if he makes a ridiculous and unfair decision contrary to both the evidence and the law, there simply is no remedy. The decision is final. Appeals are limited primarily to cases where there has been outright fraud, misconduct or partiality on the part of the arbitrator, or where the arbitrator exceeded his powers or did not have jurisdiction in the first place. A bad decision or a misapplication of the law is not grounds for appeal; you are stuck with the arbitrator's decision, whatever it is. If you are a party to a contract of major importance to you or your company, you might want to think carefully before you give up the right to appeal by accepting an arbitration clause.

Extraordinary Relief. The ability to obtain extraordinary or equitable remedies is somewhat uncertain with arbitration. This includes remedies other than a money judgment, such as a restraining order, attachment, or specific enforcement. In Arizona, the courts have approved the issuance of such remedies on a provisional, or temporary, basis pending the outcome of the arbitration hearing. The courts in some other states have gone further and have held that they will enforce a final order for specific performance granted by an arbitrator, but this issue has not yet been addressed in Arizona. One must conclude, therefore, that while such remedies are probably available, it may depend on the state in which the proceeding is brought and the particular remedy that is sought.

Mutuality. If, after considering the above factors, you decide that an arbitration clause is to your advantage, you will need to make sure it is enforceable. To be enforceable, it will need to be mutual -- that is, it must apply to both parties. The law in Arizona is that an arbitration clause is not enforceable if it applies to only one party to the contract.

Conclusion. An arbitration clause can be a useful and desirable provision in many contracts. However, it also has its disadvantages. The decision to agree to arbitration should be made deliberately and with full awareness of the advantages and disadvantages.