Business contracts frequently include agreements to arbitrate rather than litigate any dispute. Often this is done based on the belief that arbitration is a less costly, more efficient method of resolving a dispute. However, there are times when one party thinks he or she will gain a strategic advantage by filing the case in court, hoping to avoid arbitration. Whether your company will be successful in requiring arbitration, or should seek to avoid it, depends on a number of factors.
What Law Applies?
Section 2 of the Federal Arbitration Act, 9 U.S.C. § 1, et al. (the "FAA") governs arbitration agreements in transactions "affecting commerce." Courts have held that a diverse variety of contracts "affect commerce," including employment contracts, service contracts, credit card agreements, and sales contracts. Section 2 of the FAA provides that arbitration agreements involving commerce are enforceable, unless general contract defenses can be applied to invalidate the agreement. [More ...]
What Do You Have to Prove?
The party seeking to compel arbitration has the burden of showing the arbitration agreement is valid. The opposing party has to defeat the agreement. [More ...]
How Have Courts Treated Motions to Compel Arbitration?
The answer to this question depends to some degree on whether you are in state or federal court. State courts seem more willing to strike arbitration agreements, or limit their enforcement. State courts are also more likely to give public policy stronger consideration based on a desire to protect the interests of the state's citizens. [More ...]
Do You Want to Enforce Your Arbitration Agreement?
Many traditional benefits of arbitration do not play out as anticipated in application. When the matter is a complex, commercial dispute, you may find the lack of compelled discovery, with no right to take depositions, to be a significant impediment to pursuing a claim. There are also few safeguards against your opponent hiding or withholding evidence. On the other hand, if depositions and full discovery are involved, the expense of arbitration can mirror that of court litigation. [More ...]
What Should You Do?
Try to avoid any surprises and be prepared. If an arbitrable dispute arises under your contract:
- Obtain counsel that specializes in commercial litigation with specific experience litigating arbitration agreements;
- Work closely with your counsel to understand how courts in the jurisdiction your arbitration agreement is subject to have treated motions to compel similar agreements and why; and
- Closely evaluate the facts of your case to best develop your litigation strategy.
Arbitration in practice is not as simple or streamlined as many people think. You will want to carefully weigh all of the factors, including those listed above, with your counsel to choose the right path. You may not want to arbitrate if some of these factors prejudice your case. Small, discrete matters, or matters requiring a specialized knowledge by the arbiters, may be well suited for arbitration. But, if it this is not the case, litigation may be the better route.
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