Claims subject to arbitration: Overview, definition, and example
What are claims subject to arbitration?
Claims subject to arbitration refer to legal disputes or claims that are agreed to be resolved through arbitration rather than through traditional court litigation. Arbitration is a form of alternative dispute resolution (ADR) where the parties involved in the dispute agree to submit their claims to an independent third party, known as an arbitrator, who makes a binding decision. This method is often used to resolve commercial, contractual, or employment disputes, especially when the parties wish to avoid the time, cost, and complexity of court proceedings.
In many business contracts, parties may include a clause stating that any disputes or claims arising from the contract will be subject to arbitration. This means that if a dispute arises, the parties will resolve it through arbitration rather than filing a lawsuit in court.
Why are claims subject to arbitration important?
Claims subject to arbitration are important because arbitration can offer a quicker, more cost-effective, and private way to resolve disputes compared to the court system. Arbitration is often seen as a less formal process and can allow for more flexibility in how disputes are handled. It also provides the advantage of having an impartial third-party arbitrator, who is often an expert in the subject matter of the dispute, making decisions that are binding on the parties involved.
For businesses, having claims subject to arbitration clauses in contracts helps reduce the risk of lengthy and expensive litigation. It can also promote faster resolution of disputes, leading to less disruption in business operations.
Understanding claims subject to arbitration through an example
Imagine two companies, Company A and Company B, enter into a contract for the supply of goods. The contract includes an arbitration clause that states, "Any disputes arising out of or relating to this contract shall be subject to arbitration."
A dispute arises when Company A believes that Company B delivered defective products. Company A files a claim, and instead of going to court, the parties agree to resolve the dispute through arbitration. An arbitrator is chosen, and after reviewing the case, the arbitrator makes a binding decision on the matter.
In another example, an employee of a company files a claim for wrongful termination. The company has an arbitration agreement in place, which means that the employee's claim will be resolved through arbitration rather than litigation in court. The arbitrator will hear the case, review the evidence, and make a decision that both parties must abide by.
An example of a claims subject to arbitration clause
Here’s how a claims subject to arbitration clause might appear in a contract:
“The Parties agree that any dispute, claim, or controversy arising out of or in connection with this Agreement, including but not limited to matters of breach, enforcement, or interpretation, shall be submitted to binding arbitration in accordance with the rules of the American Arbitration Association. The decision of the arbitrator shall be final and binding on all Parties.”
Conclusion
Claims subject to arbitration offer an alternative to traditional litigation, allowing parties to resolve disputes in a quicker, more private, and often less expensive manner. Arbitration is especially beneficial in commercial contracts, employment agreements, and consumer contracts, as it provides a clear and structured process for resolving disputes outside of the court system.
For SMB owner-managers, including an arbitration clause in contracts can help mitigate the risks of costly and prolonged court battles, ensuring that disputes are resolved efficiently while maintaining business continuity.
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.