Arbitration costs: Overview, definition, and example
What are arbitration costs?
Arbitration costs refer to the expenses incurred during an arbitration process, which is a private method of resolving disputes outside of court. These costs typically include arbitrator fees, administrative fees, legal representation, expert witness fees, and any other expenses necessary to conduct the arbitration.
Unlike litigation, where court costs are often fixed, arbitration costs can vary significantly depending on the arbitration provider, the complexity of the case, and the number of arbitrators involved.
Why are arbitration costs important?
Arbitration costs are important because they directly impact whether arbitration is a cost-effective way to resolve disputes. While arbitration can be faster and more flexible than court proceedings, it can also be expensive, especially for smaller businesses.
Understanding who is responsible for these costs is crucial. Some contracts specify that each party must cover its own costs, while others require the losing party to pay for all arbitration expenses. Businesses should carefully review arbitration clauses to avoid unexpected financial burdens.
Understanding arbitration costs through an example
Imagine two companies enter into a contract with an arbitration clause. A dispute arises, and they proceed to arbitration. The costs include:
- A $10,000 arbitrator’s fee
- $5,000 in administrative fees from the arbitration institution
- $20,000 in legal fees for attorneys
- $3,000 for an expert witness
If the contract states that the arbitration costs are split equally, each company would pay half. However, if the clause states that the losing party covers all costs, one company might have to pay the full $38,000.
Similarly, in consumer arbitration, companies often cover most of the costs to make arbitration accessible for individuals, but this depends on the terms of the agreement.
An example of an arbitration costs clause
Here’s how an arbitration costs clause might appear in a contract:
“The costs of arbitration, including arbitrator fees and administrative expenses, shall be shared equally by both parties, unless otherwise determined by the arbitrator. Each party shall bear its own legal and expert witness fees unless awarded to the prevailing party.”
Conclusion
Arbitration costs can significantly impact the feasibility of arbitration as a dispute resolution method. Businesses should carefully review contract terms to understand how costs will be allocated and ensure they are financially prepared for potential arbitration proceedings. Clear arbitration cost clauses help prevent disputes over expenses and ensure fairness in resolving conflicts.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.