Arbitration Clauses in Company Agreements

2018-06-05T22:08:26+00:00 June 6th, 2018|

Arbitration clauses are increasingly common.

The American Arbitration Association (AAA) defines arbitration as “. . . the out-of-court resolution of a dispute between parties to a contract, decided by an impartial third party (the arbitrator).”

Mediation is a good first step, but not always successful.  Sometimes parties need to resolve disputes in a more formal setting.  Arbitration clauses appear in many company agreements.  However, the parties should understand the process prior to including such a provision in a company agreement.

Arbitration clauses are authorized under Federal and Texas law.

If a company agreement does not mention the preferred method for resolving disputes, resolution of disputes between the members occur in a state or federal lawsuit.  However, Federal law and Texas law authorize parties to enter into arbitration agreements.

Parties must agree in writing to arbitrate a dispute.

Parties must agree to arbitration in writing.  If parties do not agree, they must resolve their dispute in a federal or state court.

If the agreement is for “total consideration” of $50,000 or more, there is no requirement under Texas law that the parties sign the agreement.  A dispute may arise over the applicability of the $50,000 threshold.  Out of an abundance of caution, we recommend that all parties, regardless of the nature of the transaction, sign an arbitration agreement.

Members must sign company agreements.  Arbitration agreements sometimes cover disputes between managers.  If so, the managers should sign the company agreement as well.  This assures that everyone subject to the provision is bound by it.

Arbitration clauses are increasingly common, but not for everyone.

The Cons of Arbitration

  1. Costs  

    Arbitration is frequently referenced as a cost-effective dispute resolution procedure.  However, that’s not always the case.

    Arbitration requires a filing fee.  For example, the lowest fee for a commercial arbitration is $1,725.  In contrast, filing a lawsuit with less than 10 plaintiffs in district court in Dallas County, Texas costs $292.

    Clauses may provide for multiple arbitrators.  Each arbitrator charges fees.  Typically, they charge hourly rates that add up fast.  And remember–arbitrator fees are in addition to the fees paid to the attorney attorney representing you in the arbitration.  Parties also will likely incur expert fees and court reporter fees (for deposition and/or hearing transcripts).

  2.  Contracting Away Rights Otherwise Available  

    Arbitration associations, such as the AAA, have rules.  However, the parties may modify the rules by agreement.  For example, the parties may agree to eliminate punitive damages.  They may also agree to reduce or eliminate the number of depositions.  This may reduce costs.  It may also result in the elimination of a right that the party may wish they had when in the middle of a dispute.

  3. The Loss of Appeal Rights  

    Arbitration results in a binding, final, non-appealable award.  A losing party may appeal a lawsuit judgment to higher courts that could potentially overturn a judgment.  Appeals are expensive and time-consuming.  Therefore, many parties choose arbitration over a lawsuit despite the loss of appeal rights.  Obviously, a party on the losing end of an award might wish that they never agreed to arbitration!

The Pros of Arbitration

  1. Ability to Reduce Costs  

    Eliminating certain options available in a lawsuit (such as depositions or punitive damages) reduces costs.  Let’s continue with our depositions example.  The parties to an arbitration agreement might eliminate depositions. This most likely reduces hearing preparation time and attorneys’ fees.  On the other hand, a party’s testimony on record in a deposition might be a useful tool for your attorney in an arbitration hearing.  There’s no magic eight ball.  You must decide what’s worth more.  You might favor a reduction of costs over the ability to have a lawsuit-like process in a confidential arbitration—and hope it works out in your favor.

  2. Confidentiality  

    Lawsuits are public.  While a judge in a lawsuit may order certain filings made under seal (and outside of public view), this is an exception and not the rule.  Many parties choose arbitration over a lawsuit because the entire process takes place in a confidential, private setting.  The parties typically enter into confidentiality agreements at the outset of arbitration.  The proceedings and the final award remain confidential.

  3. Efficient Proceeding with Subject-Matter Experts  

    The parties typically have more input and control over the arbitration process than they would in a lawsuit.

    Courts often handle complex cases.  When a case is filed in court, it is assigned to a judge.  The parties do not have control over which judge presides over their case.  If it is a jury trial, the parties have no control over the jurors selected for the jury pool.  The arbitration process is individually tailored to specific cases.

    An arbitration agreement may set forth a process for selecting an arbitrator.  Typically, parties agree on an arbitrator or at least eliminate certain arbitrators before a final selection is made.  Arbitrators are often experienced in a field related to the dispute or who have presided over similar arbitration hearings in the past.

Weigh the Pros and Cons; Then Make an Informed Decision

Hopefully disputes and disruption never occur in your business.  And if they do arise, hopefully they will be resolved prior to a lawsuit or arbitration being filed, such as in mediation.

There’s no way of knowing exactly what disputes will arise in the future.  Evaluate your risks and make an informed decision.  While it is not perfect, many company agreements contain arbitration provisions because the parties like the control the process provides.

Disclaimer:  This article is not a substitute for legal advice.  Every situation is different; you should not rely or act upon the contents of this article without seeking advice from your own attorney.  Use and access to this article or any materials or information provided herein do not create an attorney-client relationship between you and Christine Stroud, PLLC d/b/a Fincher Stroud Law, PLLC (the “Firm”).  By providing public access to this article, the Firm is not purporting to solicit or render legal or other professional advice or opinions on specific facts or matters, and the Firm is not creating or intending to solicit or create an attorney-client relationship between you and the Firm.