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What is an Arbitration Clause?

An arbitration clause is a contractual clause in which the parties agree that future disputes arising under the contract will not be litigated in court, but instead will be submitted to a neutral third-party arbitrator (or to a panel of arbitrators) for resolution. Arbitration was the first form of “alternative dispute resolution” to gain wide acceptance.

While the arbitration process is an alternative to court litigation, it also has notable similarities to a court process. For example, parties submit evidence to the arbitrator(s), who essentially acts as a judge. After the parties have presented their cases, the arbitrator considers the contractual dispute in light of the law and the evidence, and issues a written award, much like a judge would issue a written ruling.

On the other hand, as compared to court procedures, formalities are relaxed in arbitrations and other forms of alternative dispute resolution. For example, arbitration is conducted in an office, rather than a courtroom. Procedural rules and rules of evidence are also often relaxed. Disputes are usually resolved more quickly than through court litigation procedures, and hopefully with less expense.

While arbitration can sometimes be non-binding, that is the unusual case. Most parties agree to binding arbitration to reach finality more quickly. Thus, once an arbitration decision (or award) is rendered, there are only a limited number of issues that can be appealed. The final arbitration award is enforceable in a court of law. Even when appealed, courts have a strong policy to enforce arbitration awards.

The rules and procedures under which arbitration is conducted can vary.  A number of organizations, such as the American Arbitration Association (AAA), have developed rules to govern the evidentiary and procedural rules which apply to arbitration. The parties usually specify in the contract which set of rules will apply. Other important terms related to arbitration should be negotiated and addressed in the arbitration clause, such as the state or city in which the arbitration will take place.

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