An arbitration clause is a provision commonly included in contracts that stipulates any disputes arising from the agreement will be resolved through arbitration rather than traditional litigation in court. In such clauses, the parties agree to submit any disagreements to an arbitrator or arbitration panel, whose decision is typically binding. Arbitration clauses are favored for their potential to offer quicker, less formal, and more cost-effective resolution of disputes compared to court proceedings. They also provide parties with greater control over the selection of decision-makers and procedural rules. However, they may limit access to certain legal remedies available in court and are subject to specific laws and regulations governing arbitration agreements.
Arbitration Clause: A provision commonly included in legal contracts or agreements that stipulates that any disputes or disagreements arising from the contract shall be resolved through arbitration rather than litigation. An arbitration clause typically outlines the process, rules, and procedures to be followed in the arbitration proceedings, including the selection of an impartial arbitrator or panel, the location of the arbitration, and the governing law. By including an arbitration clause, parties agree to submit their disputes to a neutral third party for a binding decision, providing a cost-effective and efficient alternative to traditional court litigation.
An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occurs within a specific jurisdiction, it always binds the parties to a type of resolution outside of the courts and is therefore considered a kind of forum selection clause.
In the United States, the federal government has expressed a policy of support for arbitration clauses because they reduce the burden on court systems to resolve disputes. This support is found in the Federal Arbitration Act, which permits compulsory and binding arbitration, under which parties give up the right to appeal an arbitrator’s decision to a court.
Furthermore, arbitration clauses are often combined with geographic forum selection clauses and choice-of-law clauses, both of which are also fully enforceable. The result is that a plaintiff may find himself or herself compelled to arbitrate in a strange private forum thousands of miles from home, and the arbitrators may decide the case on the basis of the law of a state or a nation that the plaintiff has never visited.
An arbitration clause may nevertheless be challenged and held invalid if it designates a biassed party as the arbitrator. In Graham v. Scissor-Tail, Inc., 623 P.2d 165 (Cal. 1981), for example, the Supreme Court of California found that an arbitration clause in a contract of adhesion that necessarily puts disputes before a body that would tend to be biassed towards the defendant is unduly oppressive and therefore void as unconscionable. For this reason, many arbitration clauses designate widely recognised neutral organisations, such as the American Arbitration Association.
Other terms may void an arbitration clause. In Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal 4th 83 (2000), a California appellate court held that a one-sided arbitration clause in a contract of adhesion for employment (deemed a necessity) may also be voided as unconscionable because of the relative positions of the parties involved. In that case, the court found there to be procedural unconscionability where an employee was held to arbitration but the employer was not, and substantive unconscionability where the contract limited the damages the employee could recover through arbitration.
Some legal orders exclude or restrict the possibility of arbitration for reasons of the protection of weaker members of the public, e.g., consumers. E.g., German law excludes disputes over the rental of living space from any form of arbitration, while arbitration agreements with consumers are only considered valid if they are either signed or if the signed document does not bear any other content than the arbitration agreement. The restriction does not apply to notarized agreements, as it is presumed that the notary public will have well-informed the consumer about the content and its implications.
Informal Clauses
In keeping with the informality of the arbitration process, the law is generally keen to uphold the validity of arbitration clauses, even when they lack the normal formal language associated with legal contracts.
Clauses which have been upheld include:
- arbitration in London: English law to apply
- “suitable arbitration clause”
- “arbitration, if any, by ICC Rules in London”
The courts have also upheld clauses which specify the resolution of disputes other than in accordance with a specific legal system.
These include provisions indicating:
- that the arbitrators “must not necessarily judge according to the strict law but, as a general rule, ought chiefly to consider the principles of practical business.
- “internationally accepted principles of law governing contractual relations”
Sample Clauses
A number of international arbitration bodies provide sample arbitration clauses for parties to use.
Examples of these are:
The Chartered Institute of Arbitrators:
“Any dispute or difference arising out of or in connection with this contract shall be determined by the appointment of a single arbitrator to be agreed between the parties, or failing agreement within fourteen days, after either party has given to the other a written request to concur in the appointment of an arbitrator, by an arbitrator to be appointed by the President or a Vice President of the Chartered Institute of Arbitrators.”
The London Court of International Arbitration:
“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity, or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which are deemed to be incorporated by reference into this clause.
The number of arbitrators shall be [one/three].
The seat, or legal place, of arbitration shall be [insert city or country].
The language to be used in the arbitral proceedings shall be [insert language].
The governing law of the contract shall be the substantive law of [insert governing law].”
The International Court of Arbitration:
All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.
The American Arbitration Association also provides a wide sample of bespoke arbitration clauses on its website.
Frequently Asked Questions about Arbitration Clauses:
Q1: What is an arbitration clause?
A1: An arbitration clause is a provision included in a contract that requires the parties to resolve any disputes through arbitration rather than going to court.
Q2: Why include an arbitration clause in a contract?
A2: Including an arbitration clause provides an alternative method for resolving disputes that is often faster, more cost-effective, and less formal than going to court. It also allows parties to choose a neutral arbitrator with expertise in the subject matter of the dispute.
Q3: Is arbitration binding?
A3: Yes, arbitration is generally binding. Once a decision is reached by the arbitrator(s), it is typically enforceable in court.
Q4: Can arbitration clauses be enforced?
A4: Yes, arbitration clauses are generally enforceable as long as they meet certain legal requirements, such as being clear and conspicuous and not being unconscionable.
Q5: Can any type of dispute be subject to arbitration?
A5: In most cases, yes. However, there may be certain types of disputes that are not suitable for arbitration, such as those involving criminal matters or certain constitutional rights.
Q6: Can an arbitration clause be waived?
A6: Yes, parties can agree to waive the arbitration clause and pursue litigation instead. However, this would require mutual consent and should be clearly stated in writing.
Q7: Can an arbitration clause be modified or amended?
A7: Yes, parties can agree to modify or amend an arbitration clause, but any changes should be made in writing and signed by all parties involved.
Q8: Can an arbitration clause be invalidated?
A8: Yes, under certain circumstances, an arbitration clause can be invalidated if it is found to be unconscionable, fraudulent, or against public policy.
Q9: Can an arbitration clause be included in any type of contract?
A9: Yes, arbitration clauses can be included in various types of contracts, such as employment agreements, commercial contracts, and consumer agreements.
Q10: Can parties appeal an arbitration decision?
A10: Generally, the grounds for appealing an arbitration decision are limited. However, parties can seek to have an arbitration decision overturned if there was a serious procedural error or if the arbitrator(s) exceeded their authority.
Please note that the answers provided above are general in nature and may vary depending on the jurisdiction and specific circumstances. It is always advisable to consult with a legal professional for advice
DismissThis site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 9th April, 2024.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
- Page URL:https://dlssolicitors.com/define/arbitration-clause/
- Modern Language Association (MLA):Arbitration Clause. dlssolicitors.com. DLS Solicitors. April 20, 2024 https://dlssolicitors.com/define/arbitration-clause/.
- Chicago Manual of Style (CMS):Arbitration Clause. dlssolicitors.com. DLS Solicitors. https://dlssolicitors.com/define/arbitration-clause/ (accessed: April 20, 2024).
- American Psychological Association (APA):Arbitration Clause. dlssolicitors.com. Retrieved April 20, 2024, from dlssolicitors.com website: https://dlssolicitors.com/define/arbitration-clause/