Including an Arbitration Clause in Your Business Contracts in England

When entering a commercial contract, your business should take proactive measures to anticipate a potential dispute. Unfortunately, it is common for companies to suffer financial loss due to another business’ breach of contract. One way to protect your business is to include a suitable arbitration clause within your written agreements or in an accompanying arbitration agreement. This article will explore using an arbitration clause and whether it is the right dispute resolution mechanism for your business.

What is Arbitration?

Arbitration is a type of dispute resolution. Dispute resolution covers all methods of solving commercial disputes without lodging a court claim. Arbitration takes place before a neutral individual known as an Arbitrator. In some ways, arbitral proceedings are similar to a court hearing. However, while the Arbitrator performs the same role as a Judge, they are not legally trained and not bound by law or past legal cases. Additionally, whilst lawyers can argue on behalf of each party, the arguments and hearings are shorter and focus on the facts rather than complex legal arguments.

Types of Arbitration Clauses

This article will refer to two main types of arbitration clauses, ‘may’ and ‘shall’ clauses.

‘May’ Clause

The first type states that the parties should ‘consider’ the use of arbitration, but it is not mandatory unless one party formally requests arbitration. This allows the parties to proceed directly to legal action if they have no confidence that arbitration will resolve the dispute.

‘Shall’ Clause

The second type states that the contracting parties ‘must’ refer any dispute under the contract to arbitration. It makes arbitration mandatory for the parties and removes the chance of future legal action.

Your business needs to choose the correct form of the clause. This will depend on how keen you are to avoid court battles and have a quicker, cheaper route to resolving disputes. Let us explore the benefits and disadvantages of arbitration below.

Benefits of Arbitration

Arbitration may be preferable to litigation. Court cases can be lengthy, expensive, and within a public forum. In contrast, arbitration allows your business to quickly, economically and informally resolve disputes without airing grievances in public. The Arbitrator (or Arbitrators) will make a ‘determination’ (equivalent to a judgment) binding on the parties. There is usually no right of appeal, so that decision is final. This gives you certainty and ensures your business avoids additional time and expense in an appeal process.

Disadvantages of Arbitration

The lack of an appeal mechanism in most (but not all) arbitration processes can be problematic. Since Arbitrators do not have legal training like Judges, they may be more likely to make a mistake. Therefore, the inability to challenge an incorrect decision can be a significant disadvantage of the dispute resolution mechanism.

Similarly, since previous legal cases are not binding on an Arbitrator, their decisions are more unpredictable. Conversely, the predictability of litigation leads to most parties settling before the main court hearing based on the likelihood of success or defeat.

Finally, the losing party in a commercial court case usually pays the (reasonable) legal costs of the other side. However, this is not usually the case in arbitration. Thus, you can have a successful outcome from arbitration but still have less money due to arbitration fees.

Key Takeaways

Many business owners prefer the informality and speed of arbitration to litigation. Furthermore, arbitration tends to be confidential in comparison to public court hearings. However, some businesses may refuse an arbitration clause due to the lack of appeal mechanisms and unpredictability of the final decision. Depending on the contract and nature of the other party, it is always worth considering whether an arbitration clause could be of merit. Suppose your company is interested in arbitration but does not wish to limit its future options. In that case, you can use an arbitration clause that only makes arbitration mandatory if a party requests it.

If you need help with arbitration or the use of an arbitration clause, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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