Most lawyers instinctively suggest that clients insert arbitration clauses into all kinds of contracts. This is usually because arbitration is much more private than litigation, and, depending on a number of factors, arbitration can take a lot less time to resolve than litigation matters. However, arbitrations can sometimes be costlier than litigation, and some small businesses that might only face small matters which might be subject to arbitration may wish to pass on arbitration clauses.
Several times in my career, I have handled small matters that were sent to arbitration. These include smaller breach of contract matters, employment law matters, and other types of cases that businesses typically encounter. Once it is clear that a matter is going to be arbitrated rather than settled without arbitration, it quickly becomes evident that arbitration might not be the appropriate method to resolve the dispute.
One of the downsides of arbitration over litigation is that parties typically need to pay thousands of dollars in arbitration fees when involved in claims subject to arbitration. In litigation, litigants only need to pay modest fees associated with filing documents and making certain requests in a case. However, arbitrators typically charge hourly rates that are as high as expensive lawyers in an area. As a result, the out-of-pocket expense of an arbitration can be many more times than the out-of-pocket expense of litigation since parties are not only paying for their counsel but for the arbitrator as well.
If a small business faces smaller matters, perhaps in the range of five figures, the higher out-of-pocket cost can approach the total amount of the claim. It is generally much harder for smaller business to absorb such costs than it is for larger companies. Of course, if an arbitration is resolved earlier, parties might spend less money on attorneys fees than they would if they litigated claims, but the front-loading of arbitration costs can make it difficult for small businesses to arbitrate claims.
Arbitration clauses might make it more likely that claimants pursue cases, which can be especially damaging for small businesses. Depending on some arbitration rules, a business rather than an employee may be responsible for a substantial part, or all, of the arbitration fees associated with a matter. As a result, the claimant has less to lose from an arbitration than from litigation. Moreover, it might be easier for a claimant to represent itself in arbitration than in litigation. This is because the rules of evidence are often related in arbitration and some typical legal procedures are streamlined. Accordingly, small businesses with arbitration clauses might find themselves the target of more claims than if they did not have such clauses in various agreements.
Moreover, it is worth noting that some small businesses might not fear the publicity associated with litigation. Some small businesses might believe that their affairs will not be reported on absent extraordinary circumstances, so they do not need to have a more private process to resolve disputes. Although bigger businesses that ae regularly reported in the news might fear the publicity of litigation, this is often not a credible fear for many smaller businesses.
All told, the choice of whether to include an arbitration provision in an agreement is very nuanced. For some smaller businesses the benefits of arbitration clauses might not outweigh the costs and other downsides associated with arbitration.
Jordan Rothman is a partner of The Rothman Law Firm, a full-service New York and New Jersey law firm. He is also the founder of Student Debt Diaries, a website discussing how he paid off his student loans. You can reach Jordan through email at jordan@rothman.law.
The post Arbitration Might Not Make Sense For Small Businesses appeared first on Above the Law.
Most lawyers instinctively suggest that clients insert arbitration clauses into all kinds of contracts. This is usually because arbitration is much more private than litigation, and, depending on a number of factors, arbitration can take a lot less time to resolve than litigation matters. However, arbitrations can sometimes be costlier than litigation, and some small businesses that might only face small matters which might be subject to arbitration may wish to pass on arbitration clauses.
Several times in my career, I have handled small matters that were sent to arbitration. These include smaller breach of contract matters, employment law matters, and other types of cases that businesses typically encounter. Once it is clear that a matter is going to be arbitrated rather than settled without arbitration, it quickly becomes evident that arbitration might not be the appropriate method to resolve the dispute.
One of the downsides of arbitration over litigation is that parties typically need to pay thousands of dollars in arbitration fees when involved in claims subject to arbitration. In litigation, litigants only need to pay modest fees associated with filing documents and making certain requests in a case. However, arbitrators typically charge hourly rates that are as high as expensive lawyers in an area. As a result, the out-of-pocket expense of an arbitration can be many more times than the out-of-pocket expense of litigation since parties are not only paying for their counsel but for the arbitrator as well.
If a small business faces smaller matters, perhaps in the range of five figures, the higher out-of-pocket cost can approach the total amount of the claim. It is generally much harder for smaller business to absorb such costs than it is for larger companies. Of course, if an arbitration is resolved earlier, parties might spend less money on attorneys fees than they would if they litigated claims, but the front-loading of arbitration costs can make it difficult for small businesses to arbitrate claims.
Arbitration clauses might make it more likely that claimants pursue cases, which can be especially damaging for small businesses. Depending on some arbitration rules, a business rather than an employee may be responsible for a substantial part, or all, of the arbitration fees associated with a matter. As a result, the claimant has less to lose from an arbitration than from litigation. Moreover, it might be easier for a claimant to represent itself in arbitration than in litigation. This is because the rules of evidence are often related in arbitration and some typical legal procedures are streamlined. Accordingly, small businesses with arbitration clauses might find themselves the target of more claims than if they did not have such clauses in various agreements.
Moreover, it is worth noting that some small businesses might not fear the publicity associated with litigation. Some small businesses might believe that their affairs will not be reported on absent extraordinary circumstances, so they do not need to have a more private process to resolve disputes. Although bigger businesses that ae regularly reported in the news might fear the publicity of litigation, this is often not a credible fear for many smaller businesses.
All told, the choice of whether to include an arbitration provision in an agreement is very nuanced. For some smaller businesses the benefits of arbitration clauses might not outweigh the costs and other downsides associated with arbitration.
Jordan Rothman is a partner of The Rothman Law Firm, a full-service New York and New Jersey law firm. He is also the founder of Student Debt Diaries, a website discussing how he paid off his student loans. You can reach Jordan through email at jordan@rothman.law.
