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.

How Does the Arbitration Process Work

While the arbitration process is an alternative to court litigation, it shares some similarities with court litigation. Parties present evidence and arguments to the arbitrator(s), who essentially acts much like a judge. After the parties have presented their cases, the arbitrator considers the contractual dispute in light of the applicable law and the evidence. The arbitrator issues a written award, much like a judge would issue a court ruling.

However, arbitration differs from litigation in important ways:

• Setting: Conducted in an office or conference room, not a courtroom
• Procedures: More flexible, with relaxed procedural and evidentiary rules
• Discovery: Typically much more limited than litigation, restricting parties' ability to obtain documents and testimony
• Timeline: Disputes are usually resolved more quickly than through court proceedings
• Confidentiality: Arbitration proceedings and awards are generally private and confidential, unlike public court records

Binding vs Non-Binding Arbitration

Most arbitration clauses require binding arbitration, meaning the arbitrator's decision is final and enforceable in court. Appeals are extremely limited, typically only available for fraud, arbitrator misconduct or the arbitrator exceeding their authority. Courts have a strong policy under the Federal Arbitration Act (FAA) to enforce arbitration agreements and awards.

Non-binding arbitration, where parties can reject the award and proceed to litigation, is relatively rare. 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.

Key Terms in Arbitration Clauses

Well-drafted arbitration clauses should address:

Mutual Intent to Arbitrate: The clause must contains explicit language showing the parties mutually agree to resolve disputes through arbitration rather than litigation. Vague or ambiguous language may render the clause unenforceable. Courts require clear evidence that parties knowingly agree to forgo their right to a jury trial.

Scope: Which types of disputes are covered (e.g., "all disputes arising out of or relating to this agreement'). Some clauses carve out certain matters (like requests for injunctive relief or intellectual property claims) for court resolution.

Arbitration Rules: Many organization, such as the American Arbitration Association (AAA) have developed standardized rules governing arbitration procedures. The contract should specify which rules apply.

Venue: The city or state where arbitration will take place.

Number of Arbitrators: Whether disputes will be decided by a single arbitrator or a panel (typically three).

Arbitrator Selection: The process for choosing arbitrators, including required qualifications or industry expertise.

Costs: Arbitration involves filing fees and arbitrator compensation. The clause should specify how these costs are allocated between parties.