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Do I need an arbitration clause in my contracts?

On Behalf of | Apr 29, 2024 | Contract Law

Good contracts increase the chance of a successful construction project. You put a lot of time and effort into your contract language to ensure you are protected in the event of a dispute.

As you negotiate and draft your contracts, you wonder if you need an arbitration clause. Arbitration clauses are common in many construction contracts.

What is an arbitration clause?

An arbitration clause requires you and the other party to participate in arbitration to attempt to resolve any disputes. Arbitration is an alternative to heading straight into court when a dispute occurs.

Although arbitration takes place out of the courtroom, it is still a formal process that can feel much like a trial. You present arguments and evidence to an arbitrator. The arbitrator is a neutral third-party who listens to each side and issues a ruling.

Placing an arbitration clause into your construction contracts means you and the other party agree to arbitrate a dispute before going to court. A good arbitration clause lists the types of disputes you agree to arbitrate, where you will arbitrate and any other rules that may apply.

Pros and cons of an arbitration clause

Arbitration protects confidentiality since arbitrations are typically not part of a public record. It is also generally less costly than courtroom litigation and saves time since you will likely receive an arbitration date long before a court date.

Additionally, arbitration is helpful if you value preserving relationships since both parties usually feel more satisfied with the outcome.

Depending on your situation, arbitration might not always be the best option. Only parties listed in the arbitration clause must arbitrate.

Many construction disputes involve more than just two parties. This sometimes happens in cases involving construction defects. Contractors might be required to arbitrate without the involvement of other parties who may be potentially liable.

Arbitrators are not judges

Additionally, arbitrators are not required to follow the same rules of evidence or law as courtroom judges.

They are generally interested in seeing a fair outcome, which usually involves being fair to both parties. If the law is on your side, this might not be what you want.