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Why Should My Contracts Include an Arbitration or Mediation Clause?

Managing litigation risk is an important issue for businesses of all types and sizes. In some cases, a single over-the-top judgment can push a vulnerable business into bankruptcy. Some legal risks do not permit advance planning and risk management, such as when an employee causes a serious motor vehicle accident or a visitor to your place of business falls down a flight of stairs (although good insurance coverage would help if either of the aforementioned events ever occurred).

Other types of litigation risk—those more directly linked to the service or product your business provides—can be managed through careful use of contract law. Nearly every service or product today comes with a contract. Realtors often require you to sign a release of liability before moving forward with a closing. New vacuum cleaners come with instructions and a warranty providing that purchasers will submit to arbitration instead of pursuing traditional lawsuits.

For most businesses, the advantages to mediation and arbitration are clear:

  • Mediation is typically much less expensive than litigation. Although the mediator’s recommendations are not binding—meaning that if either side does not agree you may end up in court anyway—the process allows you to get a sense of the strength of the other side’s case and the way it might play out before a judge or jury. If the mediator can help you reach an agreement with the other side, settling out of court after mediation removes the risk and uncertainty of taking your case before a jury.
  • Arbitration is typically much faster than going to court. Arbitrators tend to be a bit more pro-business than are juries. Although fees for arbitrators can be quite a bit higher than court fees, arbitration has the advantage of speed and finality—arbitrator’s decisions are final, and can be enforced through the court system just like any other judge or jury award.

Seasoned business attorneys can help you determine whether mediation or arbitration makes more sense for you, and how to implement that decision, potentially saving your business hundreds of thousands of dollars in legal fees, attorneys’ fees, and settlement costs and saving you a great deal of aggravation.

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