Arbitration Clause in a Contract...What is That?

July 12, 2013 - Arbitration clauses in contracts are becoming more common. Before signing a contract, lease or other contract with one of these clauses, it is important to know what this means. By using this clause, the parties to the contract agree to arbitrate any future disputes. Arbitration is an out-of-court proceeding in which a neutral third party hears evidence and then makes a decision. Arbitration is the most commonly used method of alternative dispute resolution. The American Arbitration Association formally conducts the arbitration process. Arbitration resembles a court proceeding in that each side calls witnesses, presents evidence, and makes arguments.

Arbitration can be binding (participants must follow the arbitrator's decision and courts will enforce it) or nonbinding (either party is free to reject the arbitrator's decision and take the dispute to court, as if the arbitration had never taken place). Binding arbitration is more common. Most contract arbitration occurs because the parties included an arbitration clause which requires the parties to arbitrate any disputes to the contract. If an arbitration provision is not included in the contract, the parties can still arbitrate if they both agree to it.

Most appealing for companies and individuals is that arbitration is private. The decisions and what is discovered do not become public record. Arbitration can also be simpler and quicker compared to scheduled courthouse litigation. Something to keep in mind, however, unlike a court ruling, a binding arbitration ruling cannot be appealed. The costs and risks of arbitration can be significant; in some cases, they may even exceed the costs of litigation. Arbitration clauses are not necessary in every contract and should be reviwed on an individual basis.