Arbitration Clause
Last updated: February 20, 2025
What is an arbitration clause?
An arbitration clause is a contractual provision where parties agree to resolve any disputes arising from the contract through arbitration, instead of pursuing litigation in a court of law.
This alternative dispute resolution (ADR) method has become increasingly popular in the United States, offering a potentially faster and less expensive means of settling conflicts.
These clauses are commonly found in a wide array of contracts, including employment agreements, consumer contracts, and business-to-business agreements. The core purpose of an arbitration clause is to provide a streamlined, and often more private, method of resolving disagreements outside of the public court system.
By agreeing to arbitration, parties are essentially waiving their right to a trial by judge or jury, opting instead for a decision made by a neutral arbitrator or panel of arbitrators.
What does an arbitration clause do?
An arbitration clause functions as a substitute for traditional litigation.
When a dispute arises, the parties involved submit their case to an arbitrator instead of filing a lawsuit. The arbitrator reviews evidence, hears arguments from both sides and renders a decision, known as an “award.” This award is binding, meaning that it is legally enforceable in court.
Including an arbitration clause in a contract has significant implications for the parties involved. Primarily, it means forgoing the standard court procedures, such as extensive discovery, motion practice, and the right to a jury trial. Arbitration is generally more informal, with simplified rules of evidence and procedure.
Benefits of the arbitration clause
Speed: Arbitration proceedings are generally faster than court cases, as they involve fewer procedural formalities and delays.
Cost-Effectiveness: While upfront fees are associated with arbitration, it can often be less expensive than litigation, especially when considering legal fees, court costs, and the time spent on the case.
Privacy: Arbitration proceedings are typically private, allowing parties to avoid the publicity that can often accompany court cases.
Flexibility: Arbitration clauses can be tailored to meet the parties’ specific needs, giving them greater control over the dispute resolution process.
Examples of arbitration clauses
Arbitration clauses can vary in their level of detail and scope. Here are some examples to illustrate the range of possibilities:
Basic arbitration clause: Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
Detailed arbitration clause: All disputes arising out of or in connection with this agreement shall be resolved by binding arbitration in [City, State] by the rules of the American Arbitration Association. The arbitration panel shall consist of three arbitrators, one appointed by each party and the third appointed by the two selected arbitrators.
The arbitrators shall have at least ten years of experience in [relevant field, e.g., construction law]. The arbitrator’s decision shall be final and binding on the parties, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction. The parties agree to maintain the confidentiality of the arbitration proceedings and the award.
Key considerations of the arbitration clause
Arbitrator Selection: The choice of arbitrator can significantly impact the outcome of the arbitration. Parties may have the opportunity to jointly select the arbitrator or appoint one through a neutral third party.
Fees: Arbitration typically involves administrative and arbitrator fees, which are generally split between the parties. However, the fee structure can vary depending on the arbitration provider and the case’s complexity.
Appeal Process: While there may be limited opportunities for appeal in arbitration, the arbitrator’s decision is generally final and binding.
Attorney’s Fees: The issue of attorney’s fees in arbitration can be addressed in the arbitration clause itself. Parties may agree to allocate responsibility for attorney’s fees or leave it to the arbitrator to decide.
Mediation: Some arbitration clauses include a mediation step before proceeding to arbitration. Mediation can be a valuable tool for resolving disputes without resorting to a formal hearing.
Exceptions to Mandatory Arbitration
Despite the general enforceability of arbitration agreements, there are certain statutory exceptions to mandatory arbitration.
The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021: As per Congress.gov, this law renders pre-dispute arbitration agreements and class action waivers relating to sexual assault or sexual harassment claims unenforceable. This means that individuals who have experienced sexual assault or sexual harassment can choose to pursue their claims in court, even if they have previously signed an arbitration agreement.
Other Statutory Exceptions: Some state laws carve out exceptions for specific disputes, such as those involving certain consumer protection laws or employment laws. It’s essential to consult with an attorney to determine whether any exceptions may apply to your particular situation.
Arbitration clauses can be a valuable tool for efficient dispute resolution, offering potential benefits such as cost savings, faster resolution, and confidentiality. However, it’s essential to carefully consider the implications before agreeing to an arbitration clause, as it involves waiving your right to a trial in court. Be sure to carefully review the specific language of the arbitration clause and understand the rules and procedures that will govern the arbitration process. If you have any concerns or questions, it’s always advisable to consult with an attorney to ensure that your rights are protected.
Examples of standard arbitration clauses
Here are some examples of standard arbitration clauses that can be incorporated during the contract generation stage:
Consumer Contracts: “Any dispute arising from this Agreement shall be settled by binding arbitration in accordance with the rules of the American Arbitration Association.”
Employment Contracts: “All employment-related disputes shall be submitted to final and binding arbitration before a single arbitrator selected by the parties or appointed by the American Arbitration Association.”
By understanding the benefits and considerations of arbitration clauses, individuals and businesses can make informed decisions about resolving disputes and protecting their interests.
Try first. Subscribe later.
Boost your legal ops efficiency by 80%.