Arbitration clauses have been thrown into the spotlight a number of times recently thanks to Uber. The American Arbitration Association recently awarded a blind customer over $1 million to compensate her for Uber’s drivers refusing her rides and harassing her. But Uber benefitted from its arbitration clause when a court threw out a plaintiff’s claim that may have required Uber to treat its Massachusetts drivers as employees as a result of the arbitration clause.
What is arbitration?
Arbitration is an alternative dispute resolution method that entails having an agreed person (or persons) listen to the facts of the dispute and decide on a fair outcome. It keeps disputes out of court and it may, in some circumstances, be faster, more discreet, and more cost-effective. But, arbitration isn’t always appropriate.
So, what should a company consider when deciding whether to include arbitration clauses in its consumer-facing contracts?
Arbitration clauses can minimize the risk of a class action lawsuit.
Arbitration provisions that include a class action waiver can require potential class action members to arbitrate any dispute. These provisions may outline that parties waive their right to join any proposed class action by entering the agreement, which may help companies minimize their risk of future class action lawsuits.
Arbitration is speedier.
If your disputes are likely to require speedy resolution, arbitration does offer significant benefits. Pre-arbitration communications are often handled via phone or Zoom which (outside of the pandemic) allows everything to proceed more quickly.
Arbitration is private.
Litigating a dispute in court usually entails having company documents, processes, and more made public. On the other hand, arbitration is a private forum where participants sign a non-disclosure agreement that keeps your company information and the outcome of the dispute under wraps. If you’re particularly concerned about company information entering the public sphere, arbitration is advantageous.
Arbitration focuses on fairness.
This can be either an advantage or disadvantage, depending on the circumstances. Legal avenues or ‘technicalities’ that could lead to one party’s claims being thrown out by the courts, like statutes of limitations, jurisdictional issues, or constitutional arguments, aren’t necessarily fatal in arbitration. The arbitrator usually works on the basis of what’s fair, not the strict letter of the law. As a result, the outcome often results in “splitting the baby,” with neither side getting what they actually want.
Arbitration has fewer rules.
This too is a double-edged sword. The (relative) absence of procedural rules means arbitration may be less expensive and less burdensome for the parties involved. But this means that there’s less certainty too. Since arbitrators aim to resolve disputes in a way that’s fair based on the facts, the process can lead to creative ‘orders’. You need to balance the benefits of the reduced burden against the risk of uncertainty when determining whether arbitration is an appropriate avenue for dispute resolution.
Binding arbitration outcomes are difficult to appeal.
Errors made by trial judges usually pave the way for an appeal. Binding arbitration outcomes, on the other hand, can only be appealed in very specific circumstances. If the dispute is particularly high stakes, court proceedings may be a better choice.
If you want help working out whether to include arbitration clauses in your contracts, reach out. We’re here to help!
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