Should An Arbitration Provision Be Included in a Contract?

By Lisa A. Olivieri and Matthew J. Gallagher

Thomas & Libowitz, P.A.

Whether an arbitration provision should be included in a contract is a question that should be addressed whenever a contract is drafted. However, the answer is not a simple “yes” or “no.” Often, in negotiating a contract, the forum and structure for dispute resolution is not given proper consideration, and the parties may end up with a “boiler plate” arbitration provision that does not serve either party well.

Depending upon the type of contract and the potential for material issues, arbitration may be a proper forum to resolve disputes. However, the decision to include or not to include an arbitration provision in a contract should only be made after the proper due diligence and detailed discussions with the client. Boiler plate arbitration provisions may seem rather harmless on first reading and may appear to be a great alternative to a long and expensive court battle. Nevertheless, many of the standard procedures in boiler plate arbitration provisions may end up being more costly and may not be in the best interest of the client. For example, the filing fees for Complaints filed in Maryland District and Circuit Courts are generally in the range of $30-$125.

Whereas, in most arbitrations the filing fees are generally set on a sliding scale, based upon the amount of the claim. See American Arbitration Association, Commercial Arbitration Rules, Standard Fee Schedule, effective January 1, 2010. By way of example, for claims between $0 and $10,000, the initial case filing fees charged by the American Arbitration Association are $975 ($775 initial filing fee plus $200 case service fee if the case proceeds to first hearing, but payable in advance). Id. Additionally, both parties to an arbitration must pay a filing fee for any claim filed, as well as the fee(s) for the arbitrator(s). See Rules 49 and 51, American Arbitration Association, Commercial Arbitration Rules, effective June 1, 2009. So, while arbitration is often considered a less expensive alternative to litigation, this is not always the case.

Another problem often associated with arbitration is that of pre-arbitration discovery. In most arbitrations, discovery is either not available or is within the sole discretion of the arbitrator(s). See Rule 21, American Arbitration Association, Commercial Arbitration Rules, effective June 1, 2009. This may result in one party not having the opportunity to gather information and evidence from the opposing party prior to a hearing. The lack of formal discovery can place an undue burden on the client and counsel by limiting the preparation necessary to effectively and thoroughly prosecute or defend a claim. Even in those instances when discovery is permitted, it may not be governed by any specific rules of procedure.

Consequently, getting information about the opponent’s case is difficult, at best. Still another issue associated with arbitration concerns what can and cannot be submitted as evidence. Absent a specific agreement to the contrary, arbitrators are not bound by the rules of evidence. See Rule 31, American Arbitration Association, Commercial Arbitration Rules, effective June 1, 2009. This can limit counsel’s ability to properly evaluate or present a claim, as well as render the appropriate advice on settling or proceeding with a matter.

Further, arbitration generally does not provide a party with an opportunity to file a motion for summary judgment, which can result in spending a significant amount of money and time defending a frivolous claim at an arbitration hearing. See American Arbitration Association, Commercial Arbitration Rules, effective June 1, 2009. Such hearings may last for days, just like a trial, and as such can be very costly.

Last, and possibly most significant, is the limitation of appeal from arbitration. There is presumption at law that arbitration awards will be confirmed, resulting in a very narrow and limited judicial review of an arbitrator’s decision under the Federal Arbitration Act and Maryland Uniform Arbitration Act. See 9 U.S.C.A. § 10; Md. Code Ann., Cts. & Jud. Proc. § 3-224; Mandl v. Bailey, 159 Md.App. 64, 858 A.2d 508 (Md. App. 2004); and Three S Delaware, Inc. v. DataQuick Information Systems, Inc., 492 F.3d 520 (4th Cir. 2007). As such, getting an arbitrary and unjust arbitration award overturned, or seeking redress against a renegade arbitrator, is most difficult.

While there are potential drawbacks to arbitration, in some instances arbitration may be the best venue to resolve disputes between the parties. One advantage to arbitration is the ability to select an arbitrator(s) who specializes and/or has in-depth knowledge over the subject matter of the contract. Another advantage is that arbitrations provide the protection of confidentiality, as they are private proceedings, and not open to the public. Also, matters for the most part can generally be heard and decided much more speedily in arbitration compared with the court system.

Depending on the nature of the contract, the parties involved, and the potential amount in controversy, the use of arbitration as the designated method of dispute resolution should be carefully considered. If, thereafter, arbitration is selected as a means to resolve disputes, the arbitration provisions can be drafted to avoid the above noted problems with “boiler plate” arbitration provisions; for example, incorporating specific discovery procedures and evidentiary rules to govern the arbitration. This provision should be specifically negotiated and tailored to accommodate the vicissitudes of the subject contract.