An arbitration clause is a section of a contract that deals with 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, and instead will resolve their disputes through arbitration. Arbitration is a process that allows a third-party arbitrator to help with discussions between the parties.

Rather than sue each other, the parties will need to work out their differences during these arbitration sessions and reach a mutual agreement about how the problem is to be resolved. This might result in remedies similar to what a court might issues, such as a settlement payment. The difference is that arbitration is much more flexible and informal, and allows the parties to discuss the remedies on their own terms.

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

An arbitration clause can be either binding or nonbinding. A binding arbitration clause means that the arbitators decision on a specific dispute will be final and the courts will enforce it and neither party can appeal or not follow the decision. A non-binding arbitration clause allows parties to be free to reject the arbitrators decision and take the dispute to court to make a final determination. Usually parties use binding arbitration clauses since its more decisive and makes things go faster.

Who Can Artbitrate Disputes?

Arbitration can be voluntary agreed by the parties to the transaction or can be mandatory required by the courts. Most contract arbitration occur because the parties included an arbitration clause in the contract that required them to arbitrate any disputes that arise under the contract. If there is no arbitration clause included in the parties contract agreement, the parties may still agree to arbitration if they both agree to attend an arbitration session to resolve the dispute rather then having the courts make a determination

What Are the Advantage and Disadvantages of an Artbitrate Clause?

There are few advantages and disadvantages to including a arbitration clause in a contract to resolve disputes that arise under a contract:

Advantages: Arbitrations are usually faster and more efficient than going to court to resolve the dispute because it avoids courtroom procedures and is less technical. Arbitrations can also be very flexible and the parties can set up their own times to settle the dispute rather than having the court give them specific dates to attend. The parties may also choose an arbitrator that has more technical knowledge in the issue that they are disputing over rather than having a judge who has no experience in either area to give a ruling.

Disadvantages: The disadvantages of a 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 that a arbitration decision can be appealed or set aside is if a party proves that the arbitrator was biased or unfair when making the decision and as a result violated some type of public policy. In addition, arbitrations do not have an automatic discovery process where parties are required to exchange information. Parties must agree to include a discovery requirement in their arbitration clause. FInally, arbitrations are usually more costly and expensive than court litigations.

What Should Be Contained in an Arbitration Clause?

Contract arbitration clauses usually contain language such as "The parties to this contract hereby agree to resolve legal disputes through arbitration methods rather than civil lawsuits". The clause may be tailored exactly to how the parties need it to be. Such clauses should be specific and 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
  • Consequences of violating the clause

What If an Arbitration Clause Is Violated?

The way that an arbitration clause is violated is, of course if one of the parties seeks to file a lawsuit even though they agreed to settle disputes through arbitration. In essence, the parties forfeit their right to file a lawsuit with an arbitration clause.

The non-suing party may be able to present the arbitration clause to the judge in response to any papers that are served against them. 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 extinguished if they violate the arbitration clause by attempting to sue the other party.

What Does an Arbitration Cost?

Arbitrations usually cost a lot more than an average courtroom litigations or average cost of filing a lawsuit since its more private. On average, arbitrations cost about $9,000 to initiate a contract claim that is worth $80,000 while a court filing fee is only $250.

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

Arbitration clauses are very technical parts of a contract. They generally require the assistance of a lawyer, especially when it comes to drafting and reviewing such clauses. You may wish to hire a business attorney if you need assistance with an arbitration clause. Your attorney can review the clause and explain how it limits your rights. Also, your attorney can represent you in court if are involved in any type of business or contract dispute.