Unlocking the Power of Arbitration in Nonprofit Contracts

Strategic Use of Arbitration Provisions in Nonprofits' Contracts

In the nonprofit sector, organizations often face unique legal challenges that require efficient and cost-effective dispute resolution mechanisms. Arbitration provisions in contracts can offer nonprofits a strategic advantage by providing a streamlined process for resolving disputes. Below, we explore the benefits and strategic considerations for incorporating arbitration clauses in contracts, drawing on recent developments and case law.

Efficiency and Cost-Effectiveness of Arbitration

Arbitration is increasingly favored in the business context for its efficiency, cost-effectiveness, and confidentiality. Unlike traditional litigation, arbitration generally allows parties to resolve disputes more quickly and with less expense, which is particularly beneficial for nonprofits operating on limited budgets. The process is also private, protecting sensitive information related to donors and beneficiaries, avoiding potential adverse publicity and reputational harm, and has less risk of unpredictability like a “run-away” jury verdict.

Legal Framework for Arbitration

The Federal Arbitration Act (FAA), enacted in 1925, provides the foundational legal framework for arbitration in the United States. As a result, arbitration agreements involving interstate or foreign commerce are enforceable and binding. The FAA’s core principle is to support a national policy favoring arbitration, overcoming historical resistance in some areas. The Uniform Arbitration Act and its revised version offer a model statute adopted by most states to ensure the enforceability of arbitration agreements, even in the face of state laws that may be hostile to arbitration.

Arbitration Procedures and Organizations

Under these arbitration statutes, federal or state courts may be involved both before or after arbitration. Most trial lawyers prefer federal courts. However, the FAA does not automatically confer federal court jurisdiction over arbitration matters. Private arbitration, where the parties self-administer the matter, is possible but increasingly rare.

Instead, there are two major arbitration organizations in the United States and many smaller ones. The two major organizations are the American Arbitration Association (AAA) and the Judicial Arbitration and Mediation Services (JAMS).

Drafting Effective Arbitration Clauses

When drafting arbitration clauses, clarity and precision are paramount to avoid litigation to interpret the clause. Nonprofits should consider whether to use broad or narrow clauses. Broad clauses cover all disputes arising from or relating to the contract, while narrow clauses limit arbitration to specific issues. Courts have found other contractual clauses to be arbitration clauses and subjected them to the requirements for arbitration.

Strategic Tool for Nonprofits

For nonprofits, arbitration provisions offer a strategic tool for managing disputes efficiently and confidentially. However, nonprofits should carefully draft effective arbitration clauses that align with their operational needs and legal obligations. Thoughtful consideration of the scope, rules, and procedural requirements will ensure that arbitration serves as a valuable mechanism for dispute resolution.

[View source.]