What is an Arbitration Clause?

Arbitration is a form of alternative dispute resolution.  Arbitration is a means to resolve conflicts outside of the court.  Instead of a judge determining the outcome of a case, in arbitration, an arbitrator hears and decides the case.  Although arbitration is different from a judicial proceeding, courts will typically honor the awards an arbitrator imposes on the parties.  Arbitration is  also different than mediation. A mediator seeks to find a compromise between the parties, whereas an arbitrator remains impartial to the case to make a final judgment.  An arbitration clause can contractually provide for arbitration in the event of a dispute.

What is an Arbitration Clause?

Generally, parties can contractually agree to an arbitration clause.  An arbitration clause is an express agreement in the contract to arbitrate any conflicts instead of bringing an action in court.  Arbitration clauses are generally enforceable in a court of law.  Arbitration clauses can be either mandatory or voluntary.  This means that depending on how the parties want the clause to operate, the language of the clause can either allow parties to arbitrate a dispute or it can compel them to.  There is also binding and nonbinding arbitration.  In binding arbitration, the decision of the arbitrator is final, whereas in nonbinding arbitration, either party may reject the arbitration award and demand a trial.

What are the Pros and Cons of Arbitration?

There are pros and cons to everything in life, and arbitration is no different.  Listed below are a few benefits and drawbacks of arbitration.  We recommend that you review the pros and cons of arbitration with an experienced attorney when drafting your next contract.

Pros

  • Typically cheaper than litigation
  • Usually achieves a fast result
  • Can pick or assign a specific arbitrator
  • Avoids a trial by jury
  • Protects privacy of the law suit

Cons

  • Awards may be inconsistent
  • Rules of evidence are far more lax
  • Likely cannot appeal a decision
  • Lack of full range of discovery

Arbitration clauses can be very beneficial; however, it is important to understand how arbitration works and the benefits and detriments of arbitration.  If you have questions regarding your contract or wish to create an arbitration clause, please contact us.  We look forward to assisting you.

 

Print Friendly, PDF & Email