Intelligent Solutions For North Carolina Business Law Disputes

Pros vs. cons: arbitration clauses impact in NC business contracts

On Behalf of | Jul 22, 2024 | Firm News |

Many business owners automatically (and often, incorrectly) assume it is a good thing to require Arbitration in settling contract disputes.   In North Carolina, as in other states, businesses often add arbitration clauses in their contracts. These clauses are important components that specify how the parties involved will resolve disputes. Here is a brief explanation of their pros and cons:

Key benefits over litigation

Arbitration clauses often lead to resolutions that move faster and with less formality than going to court. Due to backlogs and procedural requirements, court cases can drag on for years, whereas arbitration often wraps up in a matter of months. Other advantages can be:

  • Cost-effectiveness: Arbitration, being quicker and less formal, can cost less for your legal representation compared to prolonged court battles.
  • Confidentiality: Filings and related matters in Arbitration proceedings are not automatically made public.  Filings in court cases are typically public.
  • Expert decision-makers: In arbitration, parties often choose an arbitrator with expertise significant to the dispute, leading to more informed and fair decisions.

In general, arbitration allows more flexibility, for example, in scheduling and procedural matters. The parties agree on the arbitration’s rules and procedures, which makes the process more adaptable to their needs.

Examining their disadvantages

One of the biggest drawbacks of an arbitration clause is that the arbitrator’s decision is usually final and binding with almost no option for appeal. If the arbitrator delivers an unsatisfactory outcome, the parties have little recourse to challenge it. Other disadvantages can be:

  • Potential for bias: Individuals may be concerned that arbitrators may be biased and favor Plaintiffs over Defendants, Contractors over homeowners, Physicians over patients as examples.
  • Arbitrators are not free! Costs can still be high:  Even if it is not as expensive as going to court, arbitrator fees can be substantial, and if multiple arbitrators are involved, the costs can add up quickly.  Other than paying filing fees, there is no fee paid for the judges, clerk’s or trial court administration when litigating in the court system.
  • Lack of formal discovery: Arbitration limits the discovery process, which can disadvantage a party needing extensive evidence from the other side.

Businesses must ensure their arbitration clauses are enforceable and serve their best interests. A lawyer with experience in business law can provide invaluable assistance by ensuring legal compliance, using clear language, and tailoring the contract to meet the business’s specific needs.

Arbitration clauses in North Carolina business contracts offer advantages and disadvantages. While these clauses can provide a faster, more cost-effective, and private way to resolve disputes, they also have potential downsides, such as limited appeal rights, high administrative costs and potential biases. Therefore, it is important that businesses seek legal advice for these delicate matters.