Arbitration language for contracts is specifically included in the fine print of many contracts in the form of an arbitration clause that states any disagreement between the involved parties should be handled through arbitration.

What Is an Arbitration Clause?

The term "arbitration" refers to proceedings that take place out of court. A third party, known as an "arbitrator," takes a neutral stance and hears evidence presented by both parties in a disagreement. Once all the relevant evidence has been presented, the arbitrator will then make a final binding decision. Arbitration is a common alternative method for resolving disputes. In fact, you're likely to find arbitration clauses included in the fine print of many types of contracts.

Arbitration clauses are written provisions that are included in many contracts and state that any disputes between the parties to the contract must be kept out of court and should be settled by arbitration. These clauses are included in a number of contracts, including:

  • Business contracts.
  • Commercial contracts.
  • Contracts between individuals.

Many companies choose to use arbitration clauses, particularly when they are entering into a contract with an individual, because they allow the company to:

  • Resolve disputes quietly and swiftly.
  • Avoid time-consuming and expensive legal proceeding.

It's a common view that settling disputes in this manner helps companies save time and money. Another benefit is the business is able to select a neutral decision maker who is specialized in the field of arbitration.

Binding or Non-Binding Arbitration

There are two primary types of arbitration:

  • Binding.
  • Non-binding.

Binding arbitration means all parties involved are legally required to follow the arbitrator's final decision and if they don't, the decision will be enforced by the court system. Non-binding arbitration means a party may choose to reject the decision the arbitrator makes and takes the disagreement to court. For obvious reasons, binding arbitration is much more common than non-binding arbitration.

Who Can Act as an Arbitrator?

Arbitration can happen in one of two ways:

  • On a voluntary basis.
  • On a mandatory basis.

Voluntary arbitration requires all parties involved to agree to the arbitration process. Mandatory arbitration legally requires all parties involved to participate in the arbitration process. In most cases, arbitration occurs because the parties involved in a contract included an arbitration clause that requires them to participate in arbitration in the event that any disputes or agreements arise in relation to the contract in question.

If a contract does not, for some reason, include an arbitration clause, arbitration may still happen as long as all involved parties agree to participate. However, it is rare for parties to agree to arbitration when they're already in dispute with one another. For this reason, it's a good idea to make sure contracts include an arbitration clause.

Advantages of Arbitration

There are a number of reasons to consider utilizing arbitration when a dispute arises instead of relying on the court system:

  • Arbitrators can be hand-picked, depending on expertise, temperament, and other qualifying characteristics.
  • Fewer strict rules and regulation pertaining to pleading and providing evidence make the process much easier, less expensive, and less time-consuming.
  • The process can be scheduled and completed more quickly than court proceedings.
  • Arbitration is private and kept out of the public eye.
  • There are no official records, such as transcripts, kept, except for those that are directly related to the agreement.
  • Normally, there is a lowered risk of "runaway verdicts."
  • Arbitrators are more likely to make their decisions based solely on what is fair, rather than making harsh judgments based on flukes or technicalities.
  • Arbitration procedures can be tailored to fit the specific needs and requirements of the dispute at hand.

For example, parties can be allowed to agree on limitations pertaining to the number or nature of awards before proceedings begin. They can set limitations such as:

  • The maximum and minimum of total allowed damages.
  • Types of damages, such as punitive damages and attorney fees.

Parties can also put unique rules into place, such as "baseball" arbitration, which allows both sides to provide a number and the arbitrator is required to choose one or the other, but cannot choose both.

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