Binding Arbitration Provision: Everything You Need to Know
Arbitration is an alternative means of settling a dispute. 3 min read
A binding arbitration provision is a written clause in an agreement, which requires that disputes between the relevant parties must be resolved by binding arbitration instead of in court. Arbitration is an alternative means of settling a dispute. An arbitrator, who must be an impartial third party, listens to the evidence before making a decision.
Benefits of Arbitration Clauses
Arbitration provisions are often inserted in business and trade agreements, but they can also be included in agreements with individuals. When a company inserts an arbitration provision into an agreement with an individual, it enables them to resolve conflicts efficiently and without fuss. This is largely because it removes the need to go before the courts, which tends to be a costly and lengthy process.
When a dispute is settled in arbitration, companies often assume they are benefiting in terms of saved finances and time. In addition, arbitration enables companies to work with unbiased third parties who are experts in arbitration. Arbitration is the most frequently used strategy in the context of alternative dispute resolution (ADR). There are now arbitration provisions in a wide variety of agreements.
Binding and Nonbinding Arbitration Clauses
- There are two types of arbitration clauses: binding and nonbinding.
- Binding arbitration means that the relevant parties have to adhere to the arbitrator's recommendation and this will be enforced by a judge.
- Nonbinding arbitration means that both parties can dismiss the arbitrator's judgment and take it before a judge, which makes it seem as though the arbitration didn't happen.
- The most frequently used form of arbitration is binding arbitration.
Arbitration of Disputes
- Arbitration can either be voluntary, which means that the relevant parties accept it, or it can be mandatory. If arbitration is mandatory, it becomes a necessity according to the law.
- Typically, arbitration related to a contract occurs when there is a clause in the contract stating that arbitration is necessary to resolve any contract disputes.
- If such a clause does not appear in the agreement, both parties can choose to arbitrate if they both accept the process. However, it can be difficult to get both parties to accept when conflict already exists.
A survey conducted by Public Citizen, a customer watchdog, found that the cost of starting arbitration is remarkably higher than the cost associated with initiating legal proceedings. Generally, it costs $9,000 to launch a contract arbitration in the context of a claim worth $80,000. Meanwhile, it costs roughly $250 to file a lawsuit for a claim of the same amount.
It's also worth remembering that the parties involved are responsible for paying the arbitrator, and associated fees can total over $10,000. When you include the management costs and lawyer fees — if you appoint one — an arbitration could become more expensive than a lawsuit.
Binding arbitration involves a neutral third party or a number of third parties. This person is called an arbitrator. The arbitrator hears evidence of the conflict, thinks about it, and makes a decision. A contract with a clause that states the use of binding arbitration must be in writing, and it is necessary for both parties to sign it. Binding arbitration cannot be imposed on a party if there is not already a written contract.
People often sign agreements that include binding arbitration clauses without fully understanding those clauses or how they will be imposed if a dispute arises between the parties. In contrast to the court system, arbitration does not have typical standards to adhere to. Unless standards are listed in the arbitration clause, parties have no grounds to appeal the judgment of the arbitrator.
Issues With Binding Arbitration
- In addition to potentially spending over $10,000, businesses often have an extended waiting period before the issue is brought before an arbitrator.
- However, in states such as Arizona, there is currently a backlog of cases to be heard in the courts. Therefore, the arbitration process is still faster in those states. This is only true if both parties accept the arbitration process.
- Also, even when parties have previously agreed to use arbitration, they are free to change their minds at a later stage and take the route of legal proceedings instead.
- In that situation, both parties must agree to use the court system rather than arbitration.
If you need help with a binding arbitration provision, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.