The arbitration clause definition legal provides a method to resolve disputes legally outside of court. The parties and their lawyers meet in an arbitration hearing similar to a court proceeding, in which evidence is presented and witnesses are questioned. The arbitrator who oversees the hearing will then make a decision.

This method is simpler and less formal than litigation. For example, while parties can obtain documents from one another, the rights to do so are limited. The proceedings typically take place in a conference room, not a courtroom. Lawyers, retired judges, and industry experts can all serve as arbitrators. Despite the decreased formality, in most cases, arbitrations are legally binding.

Arbitration Agreement

When two parties agree to allow an arbitrator to resolve an issue, they must sign an arbitration agreement. This document is usually legally binding. Sometimes, employees must preemptively sign an arbitration agreement that prevents them from suing their employer. However, this often requires the employee to absorb the cost of hiring an arbitrator — often thousands of dollars compared to hundreds to file in court.

Arbitration can be used to resolve most types of disputes that are usually resolved in court, including:

Sometimes, an arbitration clause is included in a contract rather than as a separate agreement. Many businesses require a mandatory arbitration clause in all the contracts they enter. This allows them to maintain confidentiality and to limit legal costs. As an employee, it is important to ensure your rights are protected when signing an arbitration agreement.

Arbitration Clauses in Contracts

This type of clause lists the contract parties' options and rights in resolving a legal dispute. In some cases, the arbitration process results in a similar decision to one the court makes, such as a financial settlement.

Arbitration is the most common type of alternative dispute resolution (ABR). Although it is usually binding, nonbinding arbitration allows either party to reject the arbitrator's decision and instead begin court proceedings.

Arbitration can be mandatory or voluntary. The average cost of arbitrating an $80,000 contract claim is about $900, compared to about $250 to file legal action for a contract dispute of the same size. In addition, you will still need to pay attorney fees and administrative costs.

Advantages and Disadvantages of Arbitration

For simple disputes, arbitration is often a good option because:

  • Resolution is faster.
  • Scheduling is more flexible.
  • You can choose an arbitrator who has technical knowledge in the industry.
  • It tends to be less hostile than courtroom proceedings.
  • Proceedings are confidential and not published in court records.

Arbitration may not be the best choice because:

  • The decision in an arbitration cannot be appealed unless you can prove the decision went against public policy or was biased.
  • It has no automatic right to discovery, although discovery can be requested.
  • Costs are significant.
  • You lose your right to a jury trial.
  • Developing a case can be more challenging with litigation.
  • Agreements can be one-sided in favor of the party that drafts the arbitration contract.

Frequently Asked Questions About Arbitration

  • Do you need a lawyer?

Consider hiring a lawyer if you have significant money or property at stake in a dispute.

  • What is the difference between binding and nonbinding arbitration?

Binding means the courts enforce the arbitrator's decision and it cannot be changed. With a non-binding arbitration, parties can opt to sue rather than accept the arbitrator's decision.

  • Who can arbitrate disputes?

Parties can agree to an arbitration, or the court can mandate it. It usually occurs because of a contractual arbitration clause.

  • What elements should a valid arbitration clause include?

Clauses should be tailored to the situation and should indicate the names of the parties the clause affects, when it will take effect, when — if ever — it will end, whether it is modifiable, and whether penalties exist for violating the clause.

If a party files a lawsuit even after signing an arbitration clause, the party they are suing can present the clause to the judge. If it is valid, he or she will likely order the parties into an arbitration.

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