When is it worth including an arbitration clause in contracts?
February 9, 2022 | 40,00 EUR | answered by Nina Koch
Dear lawyer,
my name is Valentina Voigt and I am the managing director of a small company that regularly enters into contracts with customers. Lately, there have been increasing disputes that have led to lengthy and costly court proceedings. As a result, I have heard about the possibility of including an arbitration clause in contracts to resolve disputes out of court.
The current situation shows that the traditional judicial dispute resolution process is often time-consuming, expensive, and unpredictable. This not only has negative impacts on the financial situation of my company, but also strains the relationship with my customers. Therefore, I am looking for alternative ways to resolve conflicts quickly and effectively.
My concern is that I am not sure when it is worth including an arbitration clause in contracts. I wonder if this is only useful for certain types of contracts or in certain industries. Additionally, I am unsure if using an arbitration clause carries legal risks that I should be aware of.
Therefore, my specific question to you as a lawyer is: When is it worth including an arbitration clause in contracts? Are there specific criteria or requirements that must be met? What are the pros and cons of using an arbitration clause and how can I ensure that it is legally valid?
Thank you in advance for your support and advice.
Sincerely,
Valentina Voigt
Dear Mrs. Voigt,
I understand your concern regarding the lengthy and costly court proceedings that have led to disputes with your clients. An arbitration clause in contracts can indeed be an effective way to resolve conflicts outside of court. I will therefore explain to you in detail when it is worth including an arbitration clause in contracts and what advantages and disadvantages this entails.
In general, it is worth including an arbitration clause in contracts if you prefer an alternative method of dispute resolution and want to avoid judicial disputes. This can be particularly useful in industries where conflicts frequently arise or where trust relationships with clients are particularly important. Including an arbitration clause in international contracts can also be beneficial in resolving cross-border disputes efficiently.
There are various criteria and requirements that must be met for an arbitration clause to be legally effective. Firstly, it must be clearly and unambiguously formulated and all parties must expressly accept it. Furthermore, the arbitration clause should include details about the place of arbitration, the number of arbitrators, and the applicable arbitration procedure. It is advisable to seek advice from an experienced lawyer when drafting and incorporating an arbitration clause to ensure that it complies with legal requirements.
Using an arbitration clause has several advantages, such as the confidentiality of the process, flexibility in selecting arbitrators, and quicker and more cost-effective resolution of disputes compared to court proceedings. However, there may also be disadvantages, such as the limited possibility of judicial review of the arbitration award and the need to enforce an arbitration award following the arbitration process.
Overall, an arbitration clause can be a sensible option for resolving conflicts quickly and effectively. If you have any further questions or need assistance in including an arbitration clause in your contracts, I am happy to help.
Best regards,
Nina Koch
