You may have heard about arbitration and arbitration clauses in prenups and be a little confused. What is it? What does it mean for your prenup? Generally, putting an arbitration clause in your prenup simply means you will agree to arbitrate the issues of the divorce and prenup instead of going to court. This can be cheaper and quicker than a traditional court proceeding. Let’s dive into more information about arbitration clauses in prenups.
What is arbitration?
Arbitration is one form of alternative dispute resolution that resolves disputes outside of the court system. It involves a neutral third party, known as an arbitrator, who is selected by you and your spouse to decide on the issue at hand. Unlike regular court-based litigation, arbitration is a private process that is conducted outside of the public record.
Arbitration is commonly used in commercial disputes, but it can also be used in personal matters, such as divorce or prenuptial agreements. In the case of a prenuptial agreement, an arbitration clause may be included in the contract to provide a way to resolve future issues related to a divorce.
Why choose arbitration over litigation? Well, it can be faster, less expensive, and more flexible than going to court. The parties have more control over the process, including the selection of the arbitrator and the rules that will govern the arbitration. Additionally, the proceedings are typically confidential, which can be a benefit in cases where privacy is important.
Arbitration can also be a great way to encourage settling or negotiating because it is a final decision that is unable to be changed. So, if you don’t like the outcome of the arbitration decision… you’re stuck with it. So, having an arbitration clause in a contract can encourage negotiations to handle the issue privately.
However, there are some potential downsides to arbitration. For example, the parties may have limited rights to appeal the decision of the arbitrator, and there may be a risk that the arbitrator is biased or lacks experience in the relevant area of law.
Why include an arbitration clause in a prenup?
Now that you understand what arbitration is, why would someone put it in their prenup? There are a few reasons why:
Can encourage settling
Since arbitration decisions are generally final and non-reversible, putting in an arbitration clause can encourage the spouses to negotiate and come to terms on their own without having a third-party arbitrator decide. Knowing the risk of being stuck with the decision can motivate the spouses to come to an agreement.
Protecting privacy
Another benefit of using arbitration is protecting the privacy of the couple. If the couple were to go to court, the details of their dispute would be a matter of public record, which could be embarrassing or damaging to their reputations.
Faster and less costly resolution
Arbitration can also be a faster and less costly way to resolve disputes. Litigation can take years to resolve, while arbitration can be completed in just a few months. Additionally, arbitration can be less expensive than litigation because it is typically less formal and requires less preparation time.
Flexibility in choosing arbitrators
Finally, arbitration provides more flexibility in choosing arbitrators. The couple can choose an arbitrator, which can provide a sense of control over the situation.
What should an arbitration clause include?
If a couple decides to include an arbitration clause in their prenup, the clause should be carefully drafted to ensure that it is enforceable and effective. Some of the key elements that should be included in the clause are:
Scope of disputes covered
The arbitration clause should clearly specify the types of disputes that are covered by the clause. For example, the clause could cover disputes related to the divorce and prenup agreement.
Selection of arbitrator(s)
The clause should also specify how the arbitrator(s) will be selected. The couple may choose to have a single arbitrator or a panel of arbitrators. Additionally, they may agree on a specific arbitrator or establish a process for selecting an arbitrator.
Enforceability of the arbitration award
Finally, the arbitration clause should specify how the arbitration award will be enforced. The clause may require that the award be entered as a judgment in a court of law or may provide for other methods of enforcement.
Factors to consider before agreeing to an arbitration clause
While there are many benefits to including an arbitration clause in a prenup, there are also some potential downsides. Before agreeing to an arbitration clause, it is important to consider factors such as:
Lack of access to court
If a dispute arises, an arbitration clause may limit the parties’ ability to bring their case before a court of law. This can be a disadvantage if one party feels that they may have a better chance of success in a courtroom setting.
Potential for bias
There is also a risk that the arbitrator(s) selected may be biased in favor of one party or the other. This can be a concern, especially if the arbitrator(s) have a personal or professional relationship with one of the parties.
Limited rights to appeal
Finally, the decision reached through arbitration may be final and binding, with limited rights to appeal. This can be problematic if one spouse feels that the decision was unfair or incorrect.
Examples of how an arbitration clause is applied in “real” life
Let’s look at what an arbitration clause would look like in a “real” life scenario.
Natalie and Nick have a prenup with an arbitration clause that requires arbitration for matters related to the divorce and prenup agreement.
During the divorce, they begin to argue over the terms of the prenup, and Natalie doesn’t want the prenup to be enforced. She knows that she has an arbitration clause in there, and her lawyer recommends that she settle outside of the arbitration system since it’s a final decision. With this in mind, she finally agrees to abide by the terms of the prenup.
On the other hand, in an alternate universe, Natalie might say she wants to proceed with arbitration instead of abiding by the terms of the prenup. In that case, Natalie and Nick would go through the arbitration process according to their clause, and the arbitrator would make a final decision regarding the enforceability of the prenup.
Frequently Asked Questions (FAQs) about arbitration clauses
Still confused? No worries, keep reading to hear about the most commonly asked questions about arbitration clauses.
Q: Can an arbitration clause in a prenup be enforced?
A: Yes, if the arbitration clause is properly drafted and the parties agree to it, it can be enforced.
Q: Is arbitration the same as mediation?
A: While arbitration and mediation are both alternative dispute resolution methods, there are some key differences between the two.
Mediation is when a neutral third party, referred to as a mediator, helps the spouses to negotiate a settlement. The mediator does not have the power to make a decision but instead facilitates communication and helps the parties to find common ground. The goal of mediation is to come to a mutually agreeable solution that satisfies both parties.
Arbitration, on the other hand, is when a neutral third party, called an arbitrator, is empowered to make a binding decision on the dispute. The parties present their cases to the arbitrator, who then renders a decision that is usually final and enforceable.
Q: Can I be forced to arbitrate a dispute?
A: If the parties have agreed to an arbitration clause, they can be required to arbitrate a dispute that falls within the scope of the clause.
Q: Can an arbitration award be appealed?
A: In general, arbitration awards are final and binding, with limited rights to appeal.
Q: Is arbitration cheaper than litigation?
A: Arbitration can be less expensive than litigation because it is typically less formal and requires less preparation time. However, the costs of arbitration can vary depending on the complexity of the dispute and the fees charged by the arbitration organization and the arbitrator(s).
HelloPrenup’s Mediation Clause
HelloPrenup does not have an arbitration clause option but instead a mediation option. Mediation is another alternative dispute resolution option to consider options outside of the courtroom. Mediation is different from arbitration in that there is no third party making a decision for your case that is legally enforceable. Instead, during mediation, a mediator helps you and your spouse work through issues to find a happy middle ground.
The clause states that you must have two mediation sessions before filing an action in court. You are not prevented from filing a court claim; you just need to try out mediation first. Of course, you don’t have to add this clause if you don’t want it.
Conclusion
In conclusion, an arbitration clause can be a valuable addition to a prenuptial agreement, providing a private, faster, and less costly method of resolving disputes. It can even motivate the spouses to settle outside of arbitration because of its finality. Ultimately, it’s you and your spouse’s decision on whether or not you would like to include an arbitration clause in your prenup agreement.
Sara is a bilingual Spanish-speaking attorney and legal advisor from Orange County, CA. Sara is the co-founder of Ovando Bowen LLP, along with her husband Chumahan Bowen, Esq. As a legal advisor, Sara helps her clients navigate the complexities of both business and personal affairs. Sara has been assisting individuals and families since 2009 when she worked at the Long Beach Courthouse, Self-Help Center. Book a Q&A or Full Representation with Sara here
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