Arbitration clauses are frequently used in business, commercial, and real estate transactions to lessen the risk that disagreements between the parties will result in costly and protracted litigation. Arbitration often results in business law resolutions that are faster, easier to control, less costly, and more confidential than traditional court proceedings. However, because an arbitration clause can significantly impact your rights, it is imperative to understand how they work.

Arbitration is a form of alternative dispute resolution (ADR) in which legal disputes are resolved outside of the court system. In arbitration, a neutral individual or group of individuals (either an arbitrator or an arbitration panel) is appointed to resolve the dispute.

Like a court proceeding, arbitration generally involves hearings and the submission of documents. However, it has its own set of rules, which are generally much less formal than court proceedings. The arbitrator's decision is generally final and binding on the parties.

While parties can elect to resolve their disputes via arbitration, it may also be required by contract. An arbitration clause is typically a "mini contract" within a broader agreement that lays out the circumstances under which the parties will use arbitration to resolve disputes arising out of the agreement. In some contexts, such as in employment and consumer relationships, the parties may execute a stand-alone arbitration agreement.

When Are Arbitration Agreements a Good Business Law Solution?

Arbitration generally proceeds more quickly than court proceedings and, therefore, is often less costly. Arbitration also has several other benefits, including greater predictability and confidentiality.

Court cases, judgments, and opinions are generally public records. Arbitration maintains confidentiality, shielding litigants from public attention and preserving brand reputation while resolving disputes.

In complex cases, parties risk the decision-maker misunderstanding claims, leading to excessive verdicts. In many cases, the arbitrators are subject matter experts and may be more knowledgeable about complex areas of law, such as intellectual property or securities law.

Arbitration agreements are particularly useful for companies transacting internationally. Arbitration avoids the potential disadvantages of resolving a dispute in a foreign legal system that may favor its citizens. Because U.S. court judgments may not be recognized outside of our borders, arbitration can also aid with enforcement. Under the New York Convention, an international arbitration award can be enforced in more than 160 signatory countries.

Of course, arbitration is not perfect. An arbitration decision is generally final and binding, with appeals available in very limited circumstances. That means you must be prepared to live with the outcome, win or lose. Arbitration is faster but restricts claim options and investigative methods compared to litigation. In complex disputes, the costs of arbitration can also be significant.

What Are the Key Elements of an Arbitration Clause?

While arbitration agreements are often presented as form contracts, there is no "one size fits all." Instead, each arbitration clause should be thoroughly reviewed and drafted to advance your business goals. Below are several key issues that should be addressed in any arbitration agreement:

  • Claims Subject to Arbitration: The agreement should spell out what claims will be arbitrated and whether submitting a dispute to arbitration is mandatory or optional.
  • Preliminary Issues: The agreement should state how preliminary legal issues will be decided, such as whether the arbitrator or a court will determine whether the arbitration agreement is enforceable
  • Arbitration Tribunal: While not required, agreements often set forth the arbitral tribunal that will facilitate the arbitration. Common arbitration tribunals include JAMS, the American Arbitration Association, ICDR, ICC, and LCIA.
  • Arbitrator Selection: The parties should state how many arbitrators will be appointed to decide the dispute and agree to a process for selecting an arbitrator or panel of arbitrators. For instance, one commonly used process often involves the parties being provided a list of arbitrators and allowing each side an alternating strike until an arbitrator is picked.
  • Choice of Law: Since contracting parties are often located in different states or countries, the arbitration agreement should establish the substantive and procedural law governing the arbitration.
  • Arbitration Rules: Each arbitration forum has its own rules.
    Certain forums, like AAA, have rules for distinct disputes, such as commercial, construction, or employment cases. If it is advantageous to proceed by specific rules, they should be stated in the agreement.
  • Discovery Limitations: While discovery is generally streamlined in arbitration, the parties may elect to include specific limitations and timelines to ensure that the arbitration process does not get bogged down in discovery. Limitations may include the exclusive use of document exchanges or allocating each party a set number of depositions.
  • Confidentiality: To maintain privacy during arbitration, the parties may include provisions mandating the confidentiality of the proceedings and the resulting arbitration award.

Enforceability of Arbitration Agreements

While they have become increasingly controversial in recent years, arbitration agreements are generally enforceable just like any other contract. In most cases, to be enforceable an arbitration agreement must: firstly, be in writing. Next, it must include unambiguous text that demonstrates the parties' intent to submit disputes to arbitration. Lastly, it must be supported by bilateral consideration.

Nonetheless, both federal and state laws specifically govern the enforceability and implementation of arbitration clauses. For instance, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA) prohibits employers from requiring employees to arbitrate disputes related to sexual assault or harassment. Under New York law, employers may not make arbitration of discrimination-related claims mandatory.

Our Business Law Attorneys Can Help Draft, Negotiate, and Enforce Arbitration Clauses

We assess if arbitration suits our clients, offering an alternative to court proceedings at Scarinci Hollenbeck. We negotiate arbitration clauses in many contexts, such as employment, real estate, intellectual property, and business law transactions.

When arbitration is used, the attorneys of our Alternative Dispute Resolution Practice Group can be called upon to leverage their exceptional negotiation skills and decades of dispute resolution experience to resolve the matter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.