Non-Binding Arbitration Clause: Everything You Need to Know
A non-binding arbitration clause is a provision in a contract which states that any issues with the contract must be carried out through arbitration.4 min read
A non-binding arbitration clause is a provision in a contract for arbitration. This provision states that any issues with the contract must be carried out through arbitration, but the non-binding aspect means that the parties are not bound to the decision of the arbitrator once the process is complete.
What Is an Arbitration Clause?
Arbitration refers to a type of ADR (alternative dispute resolution). Many courts encourage individuals and companies to handle disputes through arbitration because it is less time-consuming and less expensive than full court trials with formal litigation. An arbitration clause is found in a contract. It means that both parties agree to carry out any dispute resolution through arbitration.
Many agreements commonly include arbitration clauses. You'll likely find then in:
- Employment contracts
- Securities trading contracts
- Credit card contracts
- Home repair contracts
- Health insurance contracts
- Telephone service contracts
- Sales and financing contracts
What Is an Arbitrator?
An arbitrator is like a judge in the courtroom. They are a third party who is meant to make an impartial decision regarding the dispute after conducting the arbitration process with the parties involved. They will listen each side of the argument and evaluate the evidence. Their final decision is called the award.
Binding Arbitration Clause Versus Non-Binding Arbitration
When two parties agree to binding arbitration, they waive their rights to court trials and they agree to be bound to the decision of the arbitrator. This is ideal in business conflicts between employees and companies when a decision needs to be reached quickly.
For example, if a construction company agrees to work for a retail company by building them a new storefront, they need to be able to handle issues quickly. If there is a misunderstanding about the form of payment agreed upon in the contract, the retailer is going to want to settle the issue quickly so they can open their store. The construction company also wants to get paid, so they'll benefit from arbitration as well.
Most agreements for binding arbitration do not allow either party to appeal the arbitrator's decision. In some cases, an award can be challenged if either of the parties involved can prove that fraud or public policy infringement has taken place. In order to uphold and validate the arbitration process, courts value the expertise and fair judgment of the arbitrator. Again, it's in the best interest of the court system to show that arbitration is a valuable alternative dispute resolution.
Sometimes arbitration is non-binding. If both parties agree to a non-binding arbitration clause, they agree to pursue conflict resolution through arbitration, but they are not bound to the decision of the arbitrator. The award decided isn't enforceable and can be challenged. If either party is displeased with the arbitrator's decision, they have the right to pursue a full court trial.
Why Use a Non-Binding Arbitration Clause?
There are many reasons to choose a non-binding arbitration clause over a binding arbitration clause. Even though non-binding arbitration might not provide a final settlement or fully resolve the dispute, it can help the parties involved learn about better conflict resolution. Arbitration tends to be healthier for working relationships. Sometimes, full court trials can get ugly, so arbitration is more likely to preserve a positive work environment or relationship.
Arbitration can also bring out the strengths and weaknesses of the arguments on either side of the issue. If the parties involved decide to reject the arbitrator's decision and take the issue to court, they may have a better understanding of how to strengthen their argument before the trial.
Many times, parties will choose non-binding arbitration for an issue that is not very complex or when they simply need some professional guidance and input on the issue. Anytime an issue between two parties is causing their communication practices to deteriorate, getting an unbiased third party involved can work wonders. They could be able about to not only come to a mutual agreement, but also save their relationship.
Cases involving child custody disputes are usually carried out through non-binding arbitration. The goal is usually to help both individuals involved to work on creating realistic goals and building a safe and welcoming environment for the child or children involved.
Certain states actually require non-binding arbitration in some disputes. The state of Florida, for instance, legally requires both sides in a business dispute to submit their issue to arbitration before taking it to court. This is with the hopes that the parties involved with each gain a more thorough understanding of the problem.
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