Understanding Arbitration Clauses in Contracts

A guide by The Rozhik Law Firm

Arbitration, a prevalent form of alternative dispute resolution (ADR), is frequently employed to address various disputes outside the conventional court system. Notably, it finds common application in commercial disputes. Delving into the specifics of arbitration clauses in contracts sheds light on their significance.

What is an Arbitration Clause?

An arbitration clause is a contractual provision that designates arbitration as the method for resolving disputes arising from or related to the contract, as opposed to traditional litigation. In arbitration, disputing parties agree to submit their disagreements to an impartial third party, known as an arbitrator or a panel of arbitrators. The arbitrator’s decision is typically binding and legally enforceable.

Businesses and individuals often opt for arbitration clauses to expedite dispute resolution, reduce costs, and maintain privacy compared to traditional court proceedings. These clauses can be integral components of various contracts, including employment agreements, consumer contracts, and commercial agreements.

It is crucial for parties entering into contracts to thoroughly review and comprehend arbitration clauses, given their substantial impact on dispute resolution. While some argue that such clauses may restrict access to the judicial system and disadvantage consumers or employees in specific situations, others appreciate the efficiency and flexibility associated with arbitration.

Examples of Arbitration Clauses:

General Commercial Contract:

Any dispute arising out of this contract shall be settled by arbitration in accordance with the [name of arbitration rules] of the [arbitral institution]. The arbitrator’s award may be entered in any court with jurisdiction.

Employment Agreement:

Employment-related claims shall be resolved through binding arbitration, following the employment dispute resolution rules of the [chosen arbitration organization].

Consumer Agreement:

Disputes shall first be attempted to be resolved through good-faith negotiations. If unresolved within [specified period], the parties agree to submit to binding arbitration under the rules of the [chosen arbitration association].

Construction Contract:

All disputes related to this contract shall be settled through arbitration under the Construction Industry Arbitration Rules of the American Arbitration Association. The arbitrator’s award may be entered in any court with jurisdiction.

International Business Agreement:

Disputes under this agreement shall be resolved through arbitration under the rules of the [chosen international arbitration institution].

Benefits of Arbitration:

According to the Legal Information Institute, arbitration is an alternative dispute resolution method where parties agree to have their case heard by a qualified arbitrator outside of court. Decisions in arbitration are binding, akin to court cases, and the process is often more cost-effective due to less stringent procedural requirements.

Downsides of Arbitration:

While arbitration presents advantages, it also has downsides. A notable drawback is the limited avenues for appeal. Arbitration awards are typically final and binding, with restricted opportunities for appeal. Unlike court decisions, parties usually lack the right to appeal based on errors of law or fact, posing a disadvantage if a party believes the arbitrator made a significant mistake.