Including arbitration clause in vendor agreements

My company is drafting up a general contract when engaging our outside vendors. To protect our company from costly litigation, I want to include an arbitration clause, which I have seen in other contracts. Should I include it and how do I go about including it?

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Litigation Law Questions

in California Posted 6 years, 6 months ago

12 Responses

Profile Picture of Gregory Wood
Gregory Wood

Attorney at Wood IP Resolution

I suggest including aribitration clauses for the reasons you mention and others. However, great care must be taken in drafting the arbitration clause itself. Since arbitration is a creature of agreement, the arbitration clause defines how the arbitration is to be conducted and should address such things as the location of arbitration, number of arbitrators, what law will apply, the scope of discovery (should be limited because this is where most of the costs will be incurred if care is not taken), the administrating agency such as the American Arbitration Association, the time within which a decision is to be rendered etc. and perhaps most important the selection of an arbitrator who can manage the arbitration efficiently. The American Arbitration Association has sample arbitration clauses that deal with these issues. I also prefer an arbitration clause that requires the parties to meet first, then engage in mediation before or during the arbitration proceedings.

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Profile Picture of Monica Castillo
Monica Castillo

Partner at Sarrail, Castillo & Hall, LLP

You also need to make sure, if you add an arbitration clause, that it is binding, to prevent further litigation. Also consider where you will arbitrate - in your state? in the US? The forum selection is important, as is how the arbitrator (if you will only have 1 arbitrator) gets chosen, e.g. each party generates a list of names and strikes one form the list, with the sole remaining name becoming the arbitrator? Each party selects an arbitrator, and those arbitrators in turn select another who becomes the final arbitrator?

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Profile Picture of Darrell Cartwright
Darrell Cartwright

President/CEO/Owner at Cartwright Law Center, LLC

Very good advice being given in responses. I would add that you also need to be wary of the arbitration selection process. At least one state court has struck down the use of arbitration agreements when a contract mandated it, identified the arbitration company, and failed to include a successor. When the arbitration company went out of business, in that state, the business may be out of luck in enforcing their agreements, since they have no resort to litigation *or* arbitration any longer.

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Profile Picture of Alisa Levin
Alisa Levin

Owner/Principal at Law Office of Alisa Levin

Although I understand and agree with some of the responses in general, I would say that if I have an opportunity to counsel a client against an arbitration clause, or draft an agreement that could possibly include it, I would opt to avoid it. The circuit courts are better equipped to handle disputes, they provide an arena for discovery and obtaining information that can help litigants flesh out their cases, and in many cases where the parties and counsel are willing, the matter can be solved and settled or taken to trial in an expeditious fashion. Handling matters through arbitration is not always cheaper, and some states require arbitration awards to be approved by courts, and there are often mechanisms for refusing an award, which would put the parties to the circuit court anyway. Great care should be utilized in drafting such a clause, and there is no guaranty that using alternative dispute resolution such as arbitration, mediation, negotiation, etc. will be cheaper or rewarding for the parties.

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Profile Picture of Paul Minoletti
Paul Minoletti

Attorney at Law at Law Offices Paul G. Minoletti

Sample Arbitation clause below, mention state and city where the arbitration is to occur as well:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial [or other] Arbitration Rules [including the Emergency Interim Relief Procedures], and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

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Profile Picture of Martin Werner
Martin Werner

Martin Werner Attorney At Law

i would suggest against an arbitration clause and require any enforcement etc of the agreement to be conducted in the venue of your choosing with the appropriate state court and including a "prevailing party" clause which would award attorney's fees and costs (including appellate attorney fees and costs) to the party which will be awarded a judgment. this would be appropriate if in all likelihood it will be the vendor breaching the agreement rather than you company, since the "probability" of your attorney's fees as well as the vendor's attorney's fees being born by the vendor might be potential leverage to settle the dispute.

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Profile Picture of JOEL SELIK

Selik Law Offices

There is good and bad in arbitration clauses. You can include them, but you have to make sure they comply with law, i.e. say the right things in the right way.

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Profile Picture of Robert Cogan
Robert Cogan

Principal Attorney at Continuum Law

In arbitration you must pay the judges their hourly rates in addition to your other costs. Have you done a risk versus benefit analysis? Are you considering an arbitration clause because "everyone else does it?"
What is the annual dollar volume that will be done under these contracts? Do you think writing the contract yourself is really going to save you money?

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Profile Picture of Charbel Moarbes
Charbel Moarbes

Partner at Moarbes LLP

What do you mean by "outside" vendors? If you mean by that "international vendors" then it is recommended to include an arbitration clause. But it might be as costly as litigation, especially when big amounts are at stake.

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Profile Picture of ken tan

ken tan

can you define what is an aribitration clause

Profile Picture of Kerriann Sheppard
Kerriann Sheppard

Owner/Managing Attorney at Law Offices of Sheppard & Associates

An Arbitration Clause is a clause incorporated within a contract that requires the parties to handle their contractural disputes through arbitration, rather than trying to resolve the dispute in a court of law. Arbitration is similar to an administrative hearing. However, the arbitrator is chosen by the parties and paid at the rate specified by the arbitrator. The parties may choose to make the arbitration binding so that there is no right to appeal the decision made by the arbitrator in court.

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Profile Picture of Paul Minoletti
Paul Minoletti

Attorney at Law at Law Offices Paul G. Minoletti

Not a bad idea, if you go to the American Arbitration Association website there is a standard clause you can cut and paste

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