The Dangers of an Arbitration Clause

Often, the parties to a commercial contract end up using a form that has a clause requiring the parties to go to arbitration – instead of to court – in the event of a dispute. It’s a common misperception that arbitration is simpler, more efficient, and cheaper than a court proceeding.  In fact, it’s often not. 

Right off the bat, the party who wants to initiate the arbitration – basically, the party that wants to sue – faces formidable upfront costs.  The filing fee for a new case before the American Arbitration Association, for example, can be about $7,700.  If the defendant wants to countersue, there is an initial fee of about $5,500  (These figures can vary depending on the type of case and the amount of money involved in the dispute.

Also, the parties to the suit must collectively pay for the time of the arbitrator handling the case.  That’s akin to paying for the time of the judge in a lawsuit.  Arbitrators are experienced lawyers who charge a high hourly rate.

In short, in arbitration you are going to be paying huge filing fees and arbitrator fees.  By contrast, filing a lawsuit in Massachusetts state court is typically just a few hundred dollars.  And you aren’t paying the judge for his or her time.

Here’s one other major problem with arbitration – typically, you can’t appeal any judgment or decision of an arbitrator.  If you lose because the arbitrator was unfair or made a huge mistake, you can’t bring any of those issues to an appellate court.

In short, the decision to include an arbitration clause in a commercial contract can be a fateful one.