Arbitration can slash legal costs.

Litigation is incredibly expensive, and even victories can come at a high cost. That's why many organizations are writing arbitration agreements into their contracts with customers, employees, suppliers, distributors and service providers. Arbitration lets organizations resolve disputes quickly, often in a few weeks or months. Shortening the process can greatly reduce the cost.

Taking a dispute to arbitration is like going to court, with all of the usual legal protections. Parties to a dispute may appear at hearings, present evidence or call and question each other's witnesses. The hearings may take place in person, by phone, by mail--even by videoconference or over the Internet. To ensure that arbitrators handle cases and interpret the law correctly, all arbitration awards are reviewed by courts in a process called "confirmation."

To ensure that disputes go into arbitration instead of to court, it is critical to write arbitration agreements into your contracts. Once a dispute starts, the other party is much less likely to agree to arbitration, especially if the dispute is acrimonious.

It is also critical to draft an arbitration agreement that is fair and will stand up to judicial scrutiny. If an arbitration agreement is unfair, the courts will throw it out. With that in mind, here are 10 tips toward drafting better agreements:

1. Keep It Friendly: If you want to maintain the relationship, pursue the least abrasive approach. In your contract language, you may want to include a dispute resolution process that starts with an agreement to negotiate in good faith for a period of time, followed by mediation, followed by binding arbitration if the parties cannot resolve the dispute. To avoid delays, be sure to specify a time frame for each procedure.

2. Specify What's Covered: If you want the arbitration agreement to govern all disputes arising between the contracting parties, state that clearly in the contract.

3. Invoke the Federal Arbitration Act: Different states have different laws governing arbitration. If you want to draft an agreement that can be used in several states, invoke the Federal Arbitration Act. It ensures that the arbitration agreement will be enforced uniformly in different state courts.

4. Avoid Unnecessary Travel: Courts reject agreements that force the weaker party to needlessly travel a long distance. So, specify a location that is convenient for both parties.

5. Consider the Other Party's Costs: In some states, the law mandates that the financially stronger party cover some or all of the cost of arbitration. The courts see this as a way of maintaining a level playing field.

6. Specify the Applicable Law: Laws vary from jurisdiction to jurisdiction, so if it's important that the arbitrator or mediator apply the law of a specific jurisdiction, be sure to state that clearly in the agreement.

7. Follow the Legal Remedies: In most jurisdictions, legal remedies that are available in court must also be available through arbitration. This is especially true where contracting parties do not possess equal bargaining power.

8. Be Wary of Limiting Punitive Damages: Drafting parties are often tempted to limit an arbitrator's ability to award punitive damages, but, in a recent case (Pacificare Health Systems Inc. v. Book, for instance), the U.S. Supreme Court cast doubt on setting such limits.

9. Select a Reputable Administrator: The best way to ensure that an arbitration agreement will be enforced in court, if it comes to that, is to specify that the proceedings will be handled by a reputable administrator with court-tested rules and fees.

10. Specify the Award Review Process: The Federal Arbitration Act and various state laws restrict the right of courts to review arbitration awards. If you want a greater right to appeal an award, state this explicitly in the agreement or incorporate, by reference, procedural rules that provide for review by a court to determine whether the arbitrator properly applied the law.

Curtis D. Brown is General Counsel of the National Arbitration Forum. For more information, visit www.arbitrationforum.com.