Business, Legal & Accounting Glossary
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 of 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 which the plaintiff has never visited.
An arbitration clause may nevertheless be challenged and held invalid if it designates a biased 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 which necessarily puts disputes before a body that would tend to be biased towards the defendant, is unduly oppressive, and therefore void as unconscionable. For this reason, many arbitration clauses designate widely recognized neutral organizations 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, and 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.
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:
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:
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 Rules 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.
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This glossary post was last updated: 18th April, 2020 | 3 Views.