Arbitration Clauses in Contracts, What Businesses Should Know

Arbitration clauses are commonly included in commercial contracts as a way to handle disputes outside of the traditional court system. Instead of going to court, the parties agree in advance to resolve disagreements through arbitration, a private process where a neutral third party, known as an arbitrator, hears both sides and makes a decision. This approach can offer several benefits, but it also comes with some risks, particularly if the clause is not carefully drafted.

Working with a commercial lawyer or litigator is key to understanding whether arbitration is the right choice for your business and how to structure the clause so it holds up if a dispute arises.

Why Businesses Consider Arbitration Over Litigation

From a legal perspective, arbitration offers a few clear advantages. It is often faster than going to court, which can mean resolving disputes in weeks or months rather than years. It can also be less expensive. Although the parties will be required to pay the arbitrator’s fees, and counsel fees, the shortened duration of the process can lead to cost savings as compared to years of litigation.

Another major benefit is privacy. Unlike court proceedings, which are generally public, arbitration takes place behind closed doors. This can be especially important when dealing with sensitive matters such as intellectual property, trade secrets, or potential damage to a company’s reputation.

Arbitration also gives both parties the ability to choose an arbitrator with experience in the specific area of the dispute. Having someone with industry knowledge can help ensure the decision is based on a deep understanding of the issues at hand.

The Legal Risks and Limitations of Arbitration

However, arbitration is not without its downsides. One of the biggest concerns is enforceability. Courts usually support arbitration clauses, but challenges can arise, particularly when there is unequal bargaining power between the parties or if the clause is vague or poorly written. A commercial lawyer can help identify whether your arbitration clause is likely to hold up in court and how to improve it if needed.

Another point to consider is cost. While arbitration can be less expensive than litigation in some cases, it is not inexpensive. Complex matters that require multiple arbitrators or involve lengthy hearings can still lead to significant legal expenses.

There are also fewer options for appeal in arbitration, depending on the language in the arbitration clause. Once a decision is made, it is very difficult to have it overturned. This finality can be either a benefit or a drawback, depending on your perspective. If the arbitrator makes a mistake, you may have little recourse.

Concerns around potential bias may also arise, especially in situations where one party has appeared before the same arbitrator multiple times. Although arbitrators are expected to be neutral, repeat involvement can lead to questions about fairness.

Poor Drafting Of An Arbitration Clause Can Lead to New Legal Disputes

Poorly drafted arbitration clauses can cause confusion and delay instead of preventing them. Vague language or inconsistent terms can open the door to legal disputes over how the clause should be interpreted, which ultimately undermines the purpose of including arbitration in the first place.

There have been several examples of litigation sparked by the very presence of an arbitration clause. For instance, problems can arise when only one party has the right to choose between arbitration and litigation. This can lead to arguments over fairness and unpredictability. Similarly, when a business relationship is governed by multiple contracts—some with arbitration clauses and others without—it can become unclear which issues are subject to arbitration. If a third party who did not sign the agreement becomes involved in the dispute, enforcing the arbitration clause may be even more complicated. And in some situations, urgent action such as an injunction may still require a trip to court, regardless of the arbitration clause. Additionally, unless agreed otherwise, the parties to the arbitration are bound by the process, jurisdiction and appeal rights that are stated in the contract that includes the arbitration clause.  The language of the arbitration clause is important, and should be carefully considered when the contract is negotiated.

Work With a Commercial Lawyer to Get It Right

In short, arbitration clauses can be a useful tool for resolving disputes more efficiently and privately, but they are not the right solution for every contract. The key is to work closely with a commercial lawyer or litigator to understand the full implications, draft the clause with care, and consider the specific needs of your business. A well-crafted clause can help avoid future legal headaches, while a vague or unbalanced one might only make matters worse.

If You Need Help Drafting An Arbitration Clause, Contact the Knowledgeable Commercial Lawyers at Gionet Fairley Wood LLP

Poorly worded or unbalanced clauses can lead to confusion, delays, and even costly litigation. Whether you are drafting new contracts or dealing with a dispute involving an arbitration clause, it is essential to work with experienced legal professionals who understand the risks, benefits, and strategic considerations involved.

The commercial litigators at Gionet Fairley Wood LLP have the experience and insight to help your business, or its commercial lawyers, to address these complex legal issues. From contract review and drafting to enforcing or challenging arbitration clauses in court, our team is here to protect your interests and provide practical, strategic advice.

With years of experience handling commercial litigation in the Barrie, Grey, Muskoka and Simcoe County area, we can act as your legal advocates for any contract, with or without an arbitration clause. Visit our website today to schedule a consultation or call us at (705) 468 1088. 

***The information provided in this blog is for general informational purposes only and should not be construed as legal advice. If you have legal questions, we strongly advise you to contact us.