Arbitration is fashionable because it is perceived as faster and more efficient than the court system. Arbitrations resemble trials but tend to be condensed in both time and scope. Some courts require parties to business lawsuits to arbitrate them. It is common for partnership, shareholder, or LLC agreements to include an arbitration provision for potential disputes among and between its shareholders, partners, or members. (Nothing prevents two parties who lack an agreement requiring arbitration from agreeing to one when a dispute arises.)

A decision to include an arbitration provision in your governing documents should not be made without thought.  Here are some advantages to arbitrations: (1) they can be faster (depending on the workload and competency of the arbitrators); (2) they are private (unless the result has to be enforced by the court system); (3) they can sometimes result in the dispute being decided by someone knowledgeable about your industry; and (4) because they tend to be faster and more efficient, they can also be much less costly than litigating a business dispute in a traditional lawsuit.

However, there can be disadvantages: (1) conversely, arbitration can be more expensive than the courts (the courts have minimal filing fees and the judges are paid by taxpayers, whereas, in an arbitration, the parties have to pay an arbitrator, and filing fees increase with the size of the claim); (2) your appeal rights are limited, primarily to situations in which the arbitrator was biased, committed fraud, took a bribe, or committed a gross error of law or fact; (3) in certain cases, the arbitrator’s future jobs can depend on his or her satisfying an institutional client that has many arbitrations, which may introduce a bias to the proceedings.

These are matters to discuss with the lawyer who drafts your incorporation, shareholder, partnership, or LLC operating agreements.

To speak to one of our lawyers, get in touch with us at (312) 223-1699 or email Thomas E. Patterson at tpatterson@pattersonlawfirm.com for more advice and information.

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