Many business people, and even some lawyers, take it as an article of faith that any contract is improved by including an arbitration clause. If you ask them why they think a contract should contain an arbitration clause, you will probably hear something like: “because arbitration is quicker and cheaper than going to court!”

Is this true? Yes, it can be. Is it always true? No, not by a long shot.

Many people assume that simply including an arbitration clause—any arbitration clause—in their contract means that they will automatically gain the main perceived benefits of arbitration: quicker and cheaper dispute resolution.

To paraphrase Marshall McLuhan, this is yet another assumption that has outlived its uselessness.

In fact, a poorly drafted arbitration clause can have the opposite effect. Bad arbitration clauses tend to inflict extraordinary delay and expense because such clauses often result in prolonged litigation over what the clause itself means. For example, if the arbitration clause says nothing about class arbitration, is class arbitration permissible or not? Similarly, who resolves a dispute over whether or not a certain claim is covered by the arbitration clause: a judge or the arbitrator?

These pesky questions are not minor skirmishes. They are threshold battles whose outcomes will define the entire course of the arbitration proceeding to follow. Depending on the circumstances, these preliminary issues can prolong a dispute for months. When the stakes are high enough, we have even seen these issues stretch out disputes for years while the parties churn through a morass of dueling proceedings and appeals. All the while, litigation expenses continue mounting while the underlying merits of the dispute remain virtually untouched.

Even properly drafted arbitration provisions can present enormous danger. If an arbitrator rules against you, it will be very, very hard to overturn his ruling. Why? Because unlike a decision from a judge or jury, an arbitrator’s ruling cannot be overturned on appeal except for a few narrow, specific reasons, such as if the proceeding was rigged by fraud, arbitrator bias, or the like. And in some jurisdictions, an appellate court cannot overturn an arbitrator even if the arbitrator blatantly disregards the law. This is the risk you take when you bargain for the benefits of expedited, private litigation.

So how can you minimize the likelihood of either unintended litigation or a bad ruling with no way out? First, drop the assumption that arbitration is a guaranteed time and money saver. It would be great if that were always true, but it’s not. Arbitration can achieve those goals, but not always. Instead, consider the pros and cons of arbitration [hyperlink Art. 1] and invest some time considering how those apply to your specific circumstances. All things considered, if arbitration does not look like a net gain for you, then do not insist on it. Leave it to the courts to settle any disputes. Sure, they may not be perfect, but they are pretty good at it overall.

On the other hand, if you decide that arbitration is a compelling alternative to traditional litigation, then by all means include an arbitration clause in your document. However, do not rely on a generic form or some unconsidered boilerplate. Resolve to craft an arbitration clause that will establish a coherent and informed framework for resolving disputes. Calibrate that framework to your specific business needs and risks. We’ll take on this task in the third part of this series and offer some creative and practical drafting tips to achieve that objective.