Should Interior Designers Include Arbitration Clauses in their Contracts?
Most people don’t want to think about possible disputes at the start of a new business relationship or when negotiating a new deal. Interior designers are no different but, as we all know, disputes can and do happen.
And, when a dispute does arise (and friendly settlement negotiations just won't work), the parties need to figure out how they’re going to resolve their differences. Thankfully, there are effective alternatives that don’t involve engaging in complicated, lengthy and often very expensive court proceedings.
In this article, we explore some of the advantages and limitations of arbitration as an alternative dispute resolution method that interior designers can use. We also look at the best practices for drafting a good arbitration clause for interior design contracts.
Intro: What is arbitration?
Arbitration is a type of alternative dispute resolution process that requires the parties to resolve their dispute outside of the traditional court system. In arbitration, the parties agree to have their dispute resolved by one or more impartial third parties (called arbitrators) instead of a judge or jury. The requirement of arbitration will generally be agreed to by the parties in advance by including an arbitration clause in their contracts.
Arbitration is a preferred method for some because the proceedings typically take place in private and are less formal than court proceedings. This method can be used to resolve a wide range of disputes, including commercial disputes, employment disputes, construction disputes, and disputes in the design and creative industries.
However, it is important to consider the limitations of arbitration as well. For example, arbitrators may not have the same powers as a judge, and the decision of an arbitrator may not be appealable. Additionally, some types of disputes may require a court's intervention to resolve, such as a lienor’s rights to impose a lien on another’s property.
Arbitration vs. Court Proceedings
Whether going to court or arbitration is preferable depends on the specific circumstances of each case. Both have their own advantages and disadvantages.
Arbitration can have several advantages for interior designers, including:
Speed and efficiency: Arbitration is usually faster and less formal than going to court, which can save you time and money.
Confidentiality: Arbitration proceedings are often private, which can be important for sensitive or confidential matters.
Expertise: An arbitrator may have specialized knowledge in the area of dispute (including construction, contracts, and intellectual property) which can result in a more informed decision.
Flexibility: Arbitration can be less rigid than court procedures, allowing for a more tailored resolution to the dispute.
However, on the other hand, going to court may be a better option when certain legal rights or policies are at issue such as:
Public Access: Court proceedings are typically open to the public, which can provide greater transparency and accountability.
Appeal Rights: Court decisions can often be appealed, which provides a way for parties to seek a higher authority to review the case.
Legal Precedent: Court decisions can create legal precedent, which can have a broader impact on future cases.
Lien rights: In states where interior designer’s are allowed to file liens on an owner’s property, interior designers will typically need to follow certain court procedures to secure these rights.
Small claims disputes: Courts in every state have summary procedures for dealing with smaller matters, which provide a better, simpler and more cost-effective solution for resolving smaller collections matters.
Essentially, a court may be better equipped to handle certain matters and a more appropriate option than using arbitration such as when the dispute involves complex legal issues or public policy issues (such as disputes over the constitutionality of a law or regulation).
Additionally, if a party is seeking injunctive relief, such as an order to stop an activity or to compel someone to do something, a court may be the only option for obtaining this type of relief.
Ultimately, the choice between going to court and arbitration will depend on factors such as the nature of the dispute and the priorities of the parties. However, because arbitration can be an effective way to resolve the types of disputes common to the interior design industry, many interior designers choose to include arbitration clauses in their agreements with other parties.
How to draft an enforceable arbitration clause that works for your business
Here are some steps to consider when drafting a good arbitration clause:
Identify the scope of disputes: Clearly define the types of disputes that will be subject to arbitration, which can include “all disputes” and/or can be limited to only certain disputes (for example, employment disputes or intellectual property disputes). This will help to ensure that both parties understand the types of disputes that will be resolved through arbitration.
Choose an arbitration institution: Select an arbitration institution, such as the American Arbitration Association (AAA) or the International Chamber of Commerce (ICC), that will administer the arbitration. The chosen institution should have experience in resolving disputes similar to the ones that may arise under the contract.
Define the number and selection of arbitrators: Specify the number of arbitrators that will be appointed (typically one or three), and provide a process for selecting the arbitrator, such as mutual agreement of the parties or appointment by the selected arbitration institution.
Establish the rules of procedure: Identify the rules of procedure that will govern the arbitration, such as the AAA Commercial Arbitration Rules or the ICC Arbitration Rules. These rules should provide a framework for the conduct of the arbitration and help to ensure that the arbitration is fair and efficient.
Include a savings clause: Consider including a savings clause that reserves your right to right to seek provisional remedies, such as a temporary restraining order or a preliminary injunction, from a court. This can provide a party with the ability to take prompt action to preserve its rights while the arbitration is pending.
Review the clause with a legal professional: Finally, it's recommended to review the arbitration clause with a legal professional to ensure that it is legally enforceable and that it accurately reflects the intentions of the parties.
Pro Tip #1: Consider including an exception in your arbitration clause that allows the parties to have disputes resolved in small claims court when the amount in controversy falls within your state's small claims court's jurisdiction. This allows the parties to resolve disputes that involve small amounts of money through the small claims court process, which is typically faster, less formal, and less expensive than going to arbitration or pursuing a lawsuit.
What about mediation?
Arbitration and mediation are both alternative dispute resolution (ADR) processes, but they are different in several ways.
Mediation is a facilitated negotiation process in which a neutral third party, called a mediator, helps the parties reach a mutually acceptable resolution of their dispute. The mediator does not make a binding decision, but instead helps the parties communicate and reach a voluntary agreement.
Mediation can be an extremely helpful and efficient way to resolve a dispute quickly. However, since parties are not bound by a mediator’s decision, parties that are not willing to settle at this early stage of a dispute might not be that open to a mediator’s recommendations or willing to participate in meaningful negotiations.
On the other hand, arbitration is a more formal process, where a neutral third body hears evidence and makes a binding decision on the dispute. Since the arbitrator’s decision is enforceable on the parties, just like a court decision, arbitration offers a final resolution to the dispute.
Cost of arbitration vs. going to court
The cost of arbitration in the United States can vary depending on a number of factors, including the complexity of the dispute, the number of arbitrators appointed, and the specific procedures and services provided by the arbitration institution.
Typically, the cost of arbitration includes the fees charged by the arbitrator(s) for their services, the administrative fees charged by the arbitration institution, and any other expenses related to the conduct of the arbitration, such as witness fees and the cost of transcripts.
In some cases, the parties may agree to split the cost of the arbitration equally or to allocate the cost based on some other arrangement. In other cases, the arbitration institution may have a set fee schedule or may charge a percentage of the amount in dispute.
It's important to keep in mind that the cost of arbitration can still be less than the cost of litigating a dispute in court, especially if the dispute is complex or involves a large amount of evidence. However, the exact cost of arbitration will depend on the specific circumstances of the dispute and the preferences of the parties involved.
Final Thoughts…
Ultimately, the decision to use arbitration or another alternative dispute resolution mechanism is a business decision that should be made based on careful consideration of the specific circumstances and needs of your business. You should always seek the advice of a qualified attorney licensed to practice in your state to determine whether an arbitration clause is appropriate for a given contract, and, if so, the extent to which any exceptions or carveouts should apply.
If you need help getting started, many of our contract templates include sample arbitration clauses that interior designer can use with their clients, their subcontractors, and other parties to an agreement. Find out more at the ID Law Shop.
This article is provided for general informational purposes and should not be construed as legal advice nor as a solicitation of or advertisement for legal services. Legal advice is specific to each situation and if you have a legal issue, you should consult a qualified attorney licensed to practice in your state. No actual or implied attorney-client relationship is created by virtue of this article or by your purchase of any templates from the ID Law Shop.
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