An arbitration contract is a written agreement in which parties agree to settle a dispute without going to court.

What Is an Arbitration Agreement?

Of the various alternative dispute resolution (ADR) methods, arbitration is the most common. Many contracts contain an arbitration clause somewhere in their fine print.

A dispute may involve any of the following:

  • A claim of unfair treatment in the workplace
  • Performance of a specific agreement
  • Faulty products

People can use arbitration for just about anything they could resolve through court proceedings, and many people consider arbitration a quick and relatively inexpensive way to handle disputes.

An arbitration agreement can be a simple provision that states by signing the contract, you agree to arbitration if any future disputes arise. For instance, a business owner can keep potential dispute costs low by requiring anyone he or she does business with to sign an arbitration agreement. For more complicated business matters, including a mandatory arbitration clause may be required.

Arbitration may be binding or nonbinding. In a binding agreement, participants must respect the arbitrator's decision and follow it. The courts will enforce it. In a nonbinding agreement, either party can reject the arbitrator's decision. When that happens, the party may pursue legal proceedings. It's more common to have binding arbitration.

Does Your Arbitration Clause Protect You?

No one wants to think about disputes, but you should consider how you'll resolve potential conflicts before they happen. The time to think about dispute resolution is when you enter into a contract.

In recent years, courts have reached a number of decisions that affect the arbitration process. As a result of these decisions, many parties who've gone through arbitration have concluded that their arbitration agreements may lead to unexpected resolutions. In light of that, you want to make sure that an arbitration provision addresses the following issues:

Option to Arbitrate

Most arbitration clauses let just one party decide if the matter should be arbitrated instead of taken to court. Currently, courts are reviewing these types of clauses.

Timing of Arbitration

For certain situations — such as construction projects — most clauses postpone arbitration until project completion. Ideally, arbitrations are completed as soon as possible after the dispute arises. Speedy arbitrations prevent disputes from getting larger.

An alternative provision is a requirement for mediation, which is a dispute resolution process involving a facilitator who tries to get a voluntary settlement on the part of both parties.

Arbitration Forum

The following should be taken into consideration when choosing a forum:

  • Forum rules
  • Arbitration panel members
  • The cost

It's important to pay special attention to the forum's arbitration rules because they're included in the arbitration clause.

Discovery

In general, the discovery process — such as producing documents and depositions — is expensive and time-consuming. However, discovery can be invaluable when it comes to analyzing the other side's case and presenting your own.

Most arbitration clauses limit pre-arbitration discovery. A well-written arbitration clause will expand or restrict discovery based on the dispute's dollar value.

The Award

You may wish to write an arbitration clause requiring that the arbitrator's decision complies with substantive law. In the event the arbitrator violates this provision, you or the other party may seek to overturn the decision because the arbitrator exceeded its authority under the contract clause.

You also want the court to have sufficient information in order to properly review the arbitrator's award. To achieve this, include a requirement for an arbitrator to submit a well-reasoned opinion. This opinion should not only include the arbitrator's factual statement of determination but also the conclusions that the arbitrator reached.

Standard for Court Review

You should also include a provision in the agreement that states you want courts to review any decisions for compliance with substantive law if that's what you desire.

Not all disputes wind up in court. This helps prevent the court system from becoming even more bogged down. It also saves time and money on the part of contractual parties. In many cases, especially for minor disputes that don't involve large sums of money, arbitration may work just fine. If you're unsure if this is the right choice for you, consult with a legal professional for advice.

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