Imagine you own a chain of coffee shops in Illinois, and you have been ordering espresso beans from the same supplier for a year. Suddenly, the supplier starts sending you bad beans and it is hurting your business.
Your contract says they have to replace the beans and give you a refund. You ask them to but they refuse. Now you are stuck with bad beans and unhappy customers.
You look at the contract and it says that any disputes will be resolved in binding arbitration.
What is arbitration and how is it different from litigation?
Arbitration is a way to resolve disputes without going to court.
It is similar to a lawsuit in court, but usually faster and simpler.
Most contracts name an organization like the American Arbitration Association to manage the process.
Arbitration clauses typically look something like this:
“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof."
Here's how it works:
Usually each side hires a lawyer to represent them. At the hearing, each side can call witnesses, question the other side’s witnesses, and argue their side of the case.
Arbitration can be binding or non-binding, depending on what the contract says.
In binding arbitration, both sides must accept the arbitrator’s decision.
In non-binding arbitration, either side can reject the decision and take their case to court.
Arbitration clauses are common in most contracts and you will need to decide if agreeing to arbitration makes the most sense for your business.
Here are some advantages of arbitration:
But arbitration is not always the best option. There can be disadvantages as well:
If you’re signing a contract, it is important you understand the arbitration clause. Weigh the pros and cons of arbitration vs. litigation and consider which is best for your business.
Disputes are rare, but planning ahead can save you time and money.
If you are unsure about whether agreeing to arbitration in a contract makes sense for you, we recommend consulting with a small business lawyer.
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Disclaimer: The information contained in this article has been prepared by Small Business Legal Solutions LLC for general informational purposes only. Nothing in this article is intended to constitute legal advice on any subject matter. The materials in this article are not intended to and do not create an attorney-client relationship. Do not act or refrain to act based on any information contained in this article without first personally consulting with an attorney. Every circumstance is different and must be judged on its own merits.