Binding arbitration clauses have become very common in a lot of contracts between businesses (or even between businesses and clients or customers). The goal, of course, is to keep issues out of court and, in the process, reach resolutions without having to go through expensive litigation.
That’s an admirable goal, but you should still be cautious about agreeing to any mandatory and binding arbitration terms in a contract without careful scrutiny.
In a contract, everything is negotiable
If you’re a consumer who wants to use a company’s products or services, you may not have a lot of leverage to change any terms in your contract. It’s different, however, for business-to-business contracts, where everything can (and should) be negotiated.
It’s critically important to remember that if you agree to binding arbitration, you are handing a lot of authority to the arbitrator. If you think (or know) that the call the arbitrator made is unjustified or biased, you don’t give yourself much recourse.
Instead of agreeing to a binding arbitration clause and hoping for the best, consider limiting the arbitrator’s power. If you and the other party agree to non-binding arbitration instead, that means the arbitrator’s decision-making authority would be limited. They could make a recommendation, based on all available evidence, but it would not be enforceable.
If you cannot avoid binding arbitration, you can at least try to make sure that you have a fair deal when it comes to the choice of arbitrator. Some opt for a three-person panel of arbitrators (one chosen by each side and one mutually agreed upon), while others permit a single arbitrator, chosen together.
Ultimately, it’s often wisest to remember that arbitration isn’t always the most expedient nor the least expensive route to end a business dispute. Sometimes the specter of litigation is simply more effective.