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What is an Arbitration Clause?

what is an arbitration clause

What Is an Arbitration Clause?

Business owners may want to include arbitration clauses in their corporate contracts. Arbitration is typically a good method for resolving disputes, especially for simple contract disputes that can be resolved quickly or easily.

If you are a business owner who wants to know more about arbitration clauses and why you need one in your contracts, this guide to nonbinding and binding arbitration clauses can give you the information you need.

What Is Arbitration and How Does It Work?

Arbitration is the process used to resolve legal disputes or conflicts between parties. In some cases, the parties involved may agree to submit to arbitration voluntarily, which is known as nonbinding arbitration. In other situations, arbitration is required, which is known as binding arbitration.

What Is an Arbitration Agreement?

Before arbitration can take place, both parties must agree to arbitrate the dispute in what is known as an arbitration agreement. This agreement is typically signed at the start of the business relationship, long before there is a dispute. Most arbitration agreements are located near the end of a contract under a heading like "Dispute Resolution Clause" or "Arbitration" and are only a few sentences long.

Specific agreements tend to contain language requiring that disputes are arbitrated. Of these agreements, the most common example is an employment agreement. Arbitration clauses may specify the arbitration process, how an arbitrator will be selected and which disputes will be arbitrated.

How Arbitration Works

An arbitrator conducts the arbitration process. This person is a neutral third party, and they are responsible for listening to both parties' claims. The arbitrator will use this information to make a decision about the claim. The decision the arbitrator makes is known as an arbitration award. Once the arbitrator makes their decision, it is final and cannot be appealed.

If your contract mandates the use of arbitration, the terms will be included in a provision known as a mandatory arbitration clause in the contract. This clause typically requires that you seek to resolve a dispute before using arbitration to resolve it.

Who Can Arbitrate a Dispute?

Arbitrators do not need certain qualifications or certifications to provide arbitration services, which means essentially anyone can be an arbitrator. Many former or retired judges work as arbitrators. Typically, the only requirement is that each party agrees on the arbitrator, though most arbitrators are typically experts in the industry involved.

Certain disputes cannot be arbitrated, as federal or state law may require litigation instead. For example, if there is a dispute over whether a crime occurred, this needs to be addressed via the court system. Most civil disputes, however, can be arbitrated. Contract disputes and commercial disputes can be arbitrated.

Binding arbitration is most common, as parties tend to arbitrate a dispute only when an arbitration clause is included in the contract. When an arbitration clause is not included, parties can arbitrate if they agree to it, but it can be difficult to agree to arbitrate after a dispute has already arisen.

Why Does Your Business Need an Arbitration Clause?

Balancing your legal interest with the necessary risks to expand your business is easier when you use an arbitration clause

Many businesses need an arbitration clause in their corporate contracts in the event of a dispute. The following are some of the advantages of an arbitration contract:

  • Arbitration is typically faster and more affordable than litigation, as it allows you to avoid the legal costs associated with litigation.
  • You can avoid the hostility of a courtroom dispute.
  • Arbitration is confidential, so you will not need to testify publicly. This means the details of the dispute will also not be in public court records, allowing you to avoid damage to your company's reputation.
  • You can choose the time to settle the dispute rather than be restricted to the schedule the court selects.
  • Arbitration tends to be simpler and more efficient than litigation.
  • You can select the person who will decide the dispute, which can be helpful if you wish to have a decision-maker with experience in your industry or specialized technical knowledge rather than a judge with no experience.

A legal problem can significantly hinder your business operations. Balancing your legal interests with the necessary risks to expand your business is easier when you use an arbitration clause.

What Should an Arbitration Clause Include?

An arbitration clause will include a lot of information, such as what each party agrees to or should be responsible for and what arbitrators should do in the event of a dispute.

Information Related to the Parties Involved in Dispute

The clause typically states that a dispute needs to be settled where you conduct business and the arbitrator's jurisdiction. Each party involved should cover their own legal costs, and the arbitrator's judgment is final and binding. These clauses will include the rules that apply to evidence, arguments, settlements, cross-examinations, and expert witness examinations.

Information Related to the Arbitrator

According to arbitration clauses, independent arbitrators should review and make a decision on a dispute. An arbitration clause will also specify what the arbitrator will preside over, such as discovery requests, and whether a potential arbitrator needs to meet certain qualifications like years of experience in the industry.

Arbitration Clause Example

An arbitration clause may state that all disputes and claims that arise under the agreement should be settled by binding arbitration in the state where both parties agree to arbitrate a potential dispute or another mutually agreeable location. The arbitration will be conducted confidentially, and any arbitration award or decision should be in writing and provide an explanation and assessment costs.

Any arbitration should be conducted by an arbitrator who has experience in a specified industry and should include a written record of the hearing. Each party reserves the right to object to an arbitrator who may be employed or affiliated with a competitor. A court of competent jurisdiction may confirm an arbitration award.

Contact Business Consumer Alliance for Arbitration Services Today

At BCA, we are a nonprofit organization with decades of experience providing our services to businesses and consumers. We aim to promote self-regulation for businesses. We accomplish this by helping consumers resolve complaints with businesses and using this and other information, such as customer reviews, to predict business reliability.

You can use our free complaint services to file complaints against businesses, and we can mediate those complaints. If you are a small business owner, we have valuable resources to help you run your business with little overhead and save you money in the long run. Contact us today for our arbitration services or to learn more about standard arbitration agreements.

Contact Business Consumer Alliance

About Business Consumer Alliance Business Consumer Alliance (BCA) is a non-profit company that started in 1928. The broad purpose of BCA is to promote business self-regulation. BCA's mission is achieved by assisting consumers in resolving complaints with businesses and using that complaint information, along with other relevant information such as customer reviews, to forecast business reliability. With community support, BCA can identify trustworthy and ethical businesses and warn the public to avoid unscrupulous businesses whose purpose is to defraud the marketplace. BCA also helps businesses promote themselves by providing services and tools to protect their business and reach out to their customers. BCA obtains its funding from member businesses who support the mission and purpose of the organization and who agree to abide by high standards of ethical business practices.