Arbitration clauses: Overview, definition, and example
What is an arbitration clause?
An arbitration clause is a provision in a contract that requires disputes to be resolved through arbitration instead of going to court. Arbitration is a private dispute resolution process where an independent third party, called an arbitrator, hears both sides and makes a binding or non-binding decision.
For example, a business partnership agreement may include an arbitration clause stating that any disagreements between partners must be settled through arbitration rather than a lawsuit.
Why is an arbitration clause important?
Arbitration clauses help businesses avoid costly and time-consuming litigation. They provide a faster, more flexible, and confidential way to resolve disputes. Many companies prefer arbitration because it allows them to select a neutral arbitrator with relevant expertise and avoid unpredictable court rulings.
For businesses, including an arbitration clause in contracts ensures that disputes are handled efficiently while reducing legal costs and protecting sensitive business information from public court records. However, parties should carefully review arbitration clauses, as they may limit their legal options.
Understanding arbitration clauses through an example
Imagine a software company enters a service agreement with a client. Later, the client claims the software did not meet expectations and threatens to sue. However, their contract includes an arbitration clause stating that disputes must be resolved through arbitration. Instead of going to court, both parties present their case to an arbitrator, who makes a final decision on the dispute.
In another scenario, an employee signs an employment contract with an arbitration clause stating that workplace disputes must be resolved through arbitration. If the employee later claims wrongful termination, they must follow the arbitration process rather than suing the employer in court.
An example of an arbitration clause
Here’s how an arbitration clause might appear in a contract:
“Any dispute, controversy, or claim arising out of or relating to this Agreement shall be resolved by binding arbitration in accordance with the rules of [Arbitration Institution]. The arbitration shall take place in [Location], and the decision of the arbitrator shall be final and enforceable in any court of competent jurisdiction.”
Conclusion
An arbitration clause ensures that contractual disputes are resolved through arbitration rather than litigation, providing a more efficient, cost-effective, and private dispute resolution process. While arbitration can benefit businesses by reducing legal risks, parties should carefully review these clauses to understand their rights and limitations before signing a contract.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.