Arbitration provisions are a common feature of commercial transactions for businesses trying to alleviate the burdens of litigation. In-house and transactional attorneys routinely include arbitration provisions in all flavors of commercial agreements. To put it bluntly: please stop. The professed benefits of arbitration in commercial cases are frequently overstated. Proponents of arbitration argue that it is cheaper and faster than litigation with “expert” arbiters rendering final decisions. Careful examination of these claims suggests that they are an unpersuasive justification for a process that should not be incorporated wholesale into every transaction. This article examines four of the most common justifications for arbitration and suggests examination of the knee-jerk impulse to include arbitration provisions in commercial agreements.

Arbitration Is Not Cheaper

The first fallacy of arbitration proponents is the claim that arbitration is cheaper than litigation.  Not true. For a nominal filing fee, litigants can access the full infrastructure of the state and federal court systems. The cost of the judges, law clerks, administrative staff and the courthouse are all subsidized by taxpayers. Arbitrators charge by the hour, the arbitration provider often charges by the size of the claim and the parties may have to pay a room charge. In practice, it is difficult to complete a single arbitrator arbitration of any size for less than $25,000 in costs. Despite the financial realities of arbitration, attorneys routinely include arbitration provisions that require a three-arbitrator panel in contracts even where the amount of the transaction is likely less than the costs associated with paying the arbitrators.