No arbitration: Overview, definition, and example
What is "no arbitration"?
"No arbitration" refers to a clause in a contract or agreement that explicitly states that the parties involved cannot resolve disputes through arbitration. Arbitration is an alternative dispute resolution (ADR) method where a neutral third party, called an arbitrator, is hired to make a binding decision on a dispute. When a contract includes a "no arbitration" clause, it means that any disagreements between the parties must be resolved through other methods, such as litigation in court, rather than through arbitration.
For example, if your business enters into a contract with a supplier and includes a "no arbitration" clause, any disputes related to the contract must be taken to court, rather than being handled by an arbitrator.
Why is "no arbitration" important?
A "no arbitration" clause is important because it sets the ground rules for how disputes will be handled. For some businesses, litigation in court may be preferred because it allows for more formal procedures, including the ability to appeal a decision, whereas arbitration decisions are typically final and harder to challenge. Additionally, litigation may provide more transparency, which could be crucial in some cases.
For SMBs, choosing whether or not to include a "no arbitration" clause depends on factors such as the nature of the business relationship, the potential complexity of disputes, and the desired outcomes in the event of a disagreement.
Understanding "no arbitration" through an example
Imagine your small business enters into a contract with a vendor for the supply of goods. The contract includes a clause stating that any disputes must be resolved in a court of law and not through arbitration. This means if a dispute arises, such as a delay in delivery, both parties must take the issue to court to resolve the matter, and arbitration cannot be used to settle the case.
In another example, your business may enter a contract with a client for a service agreement. If the contract includes a "no arbitration" clause, it means that in the event of any disagreement over service delivery or payment, both parties must go to court, and arbitration is not an option.
An example of "no arbitration" in action
Here’s how a "no arbitration" clause might be referenced in a contract:
“The parties agree that any disputes arising out of or relating to this Agreement shall not be subject to arbitration. Instead, all disputes shall be resolved in the appropriate court with jurisdiction over the matter.”
Conclusion
The "no arbitration" clause in a contract specifies that disputes between the parties must be resolved in court rather than through arbitration. For SMBs, deciding whether to include such a clause depends on the preference for formal litigation over alternative dispute resolution methods. Including a "no arbitration" clause helps ensure clarity on how disputes will be addressed and can be an important factor in managing risks and protecting the business's interests.
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.