What Is an Arbitration Clause?

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 What Is Arbitration?

Arbitration refers to the process used by parties to resolve legal conflicts or disputes between them. In some cases, the parties can voluntarily agree between themselves to submit to arbitration. However, in other cases, arbitration is mandatory. There are specific agreements that often contain language that requires disputes be arbitrated. The most common example of such agreements would be employment agreements

Generally speaking, the arbitration process is conducted by an individual known as an arbitrator. The arbitrator is a neutral third party who is responsible for listening to each party’s claim. They use that information to make a decision regarding those claims. The arbitrator’s decision takes the form of an arbitration award

There are certain disputes that cannot be arbitrated, due to the fact that state or federal law actually requires litigation of some matters. An example of this would be how disputes over whether a crime was committed must be addressed through the court system. However, most civil disputes between private parties can be arbitrated. Some examples of disputes that can be arbitrated include contract disputes, as well as commercial disputes which are disputes between businesses.

Alternatively, there are certain disputes that must be submitted to arbitration. This is because the agreement that the parties entered into may mandate the use of arbitration. An example of this would be a contract or an employment agreement. The terms of mandatory arbitration are detailed through a provision in the agreement. This provision is called a mandatory arbitration clause. The arbitration clause generally requires that a party seeking to resolve a dispute first try to resolve it through arbitration. 

What Is an Arbitration Clause? What Is the Difference Between a Binding and Nonbinding Arbitration Clause?

As previously mentioned, an arbitration clause is a contract provision which states when arbitration is necessary for dispute resolution. It is a section of a contract that addresses the parties’ rights and options in the event of a legal dispute over the contract. In most arbitration clauses, the parties agree not to sue each other. Instead, they will resolve their disputes through the arbitration process to avoid litigation.

Rather than sue each other, the parties will need to work out their differences during these arbitration sessions. Additionally, they must reach a mutual agreement regarding how the problem is to be resolved. Doing so could result in remedies similar to what a court might issue, such as a settlement payment. The difference is that arbitration is considered to be much more flexible and informal when compared to litigation. Additionally, the arbitration process allows the disputing parties to discuss the remedies on their own terms.

An arbitration clause can be either binding or nonbinding. A binding arbitration clause means that the arbitrator’s decision on a specific dispute will be final. The courts will enforce that decision, and neither party can appeal or fail to act according to the decision.

On the other hand, a non-binding arbitration clause allows the disputing parties to be free to reject the arbitrator’s decision. They may then take the dispute to court in order to make a final determination. In general, parties use binding arbitration clauses due to the fact that they are more decisive and require less time.

What Should Be Contained in an Arbitration Clause? What If an Arbitration Clause Is Violated?

Generally speaking, contract arbitration clauses contain language similar to: “The parties to this contract hereby agree to resolve legal disputes through arbitration methods rather than civil lawsuits”. An arbitration clause may be tailored exactly to the disputing parties needs.

Arbitration clauses should be as specific as possible. As a baseline, they should contain information such as:

  • Information regarding which parties are affected by the clause;
  • When the clause will go into effect, and when it will terminate, if ever;
  • Whether the clause can be modified in the future; and
  • The consequences of violating the clause.

The most common way in which an arbitration clause is violated is if one of the parties seeks to file a lawsuit, disregarding the fact that they agreed to settle disputes through arbitration. By signing a contract which contains an arbitration clause, the parties forfeit their right to file a lawsuit with an arbitration clause. Doing so would constitute a violation.

In response to any papers that are served against them, the non violating party may be able to present the arbitration clause to the judge. If the arbitration clause is found to be valid, the judge may order the parties to pursue arbitration according to the instructions contained in the clause. In many cases, the parties agree that their contract rights and benefits will be terminated should they violate the arbitration clause by attempting to sue the other party.

What Are the Advantage and Disadvantages of an Arbitration Clause?

There are some notable advantages and disadvantages to including an arbitration clause in a contract. Arbitrations are generally faster and more efficient than going to court in order to resolve the dispute. This is because the process avoids courtroom procedures and is less technically involved. Additionally, arbitrations can be very flexible. What this means is that the parties can set up their own times in which to settle the dispute, rather than having the court give them specific dates to attend.

The disputing parties may also choose their own arbitrator. Doing so can help ensure that the arbitrator has more technical knowledge of the specific issue that they are disputing over. This would be in opposition to having a judge provide a ruling when they have no experience in either area.

Although there are numerous advantages to the arbitration process, there are several disadvantages as well. The biggest disadvantage of arbitration is that once a ruling or determination has been made, the decision becomes final and binding. Unlike the court ruling, arbitration decisions cannot be appealed. The only way in which an arbitration decision can be appealed or set aside is if a party proves that the arbitrator was biased or unfair when making their decision. As a result, the arbitrator violated some type of public policy.

In addition, arbitration proceedings do not have an automatic discovery process in which the disputing parties are required to exchange information. Parties must agree to include a discovery requirement in their arbitration clause.

Who Can Be an Arbitrator?

Generally speaking, anyone may refer to themselves as an arbitrator. This is because there are no certifications or qualifications in order to provide arbitration services. It is common for many retired or former judges to hold themselves out as arbitrators.

The only general requirement is that both parties agree to the person they are choosing to arbitrate their dispute. However, the arbitrators traditionally chosen are experts in the business or field of law involved. In labor and employment law, there are professional arbitrators who have practiced arbitration for many years. As such, they have gained the confidence of other professionals.

An arbitration clause may specify qualifications of potential arbitrators. An example of this would be how reinsurance arbitration clauses typically require that the arbitrators be selected from among current or former officers of insurance companies. The best arbitrator source would be attorneys in your field who have used arbitration, and know about specific arbitrators. Additionally, there are alternative dispute resolution directories provided by many bar associations. The American Arbitration Association provides both a procedure and lists of arbitrators for various types of disputes, for a fee.

Should I Hire a Lawyer for Help with an Arbitration Clause?

Arbitration clauses generally require the assistance of a lawyer, especially when in terms of drafting and reviewing such clauses. You should consult with a skilled and knowledgeable contract lawyer if you need assistance regarding an arbitration clause. 

An experienced and local contract attorney can review the arbitration clause and explain how it limits your rights. Additionally, an attorney can also represent you in court as needed.

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