What Is an Arbitration Agreement?
An arbitration agreement is a binding contract in which parties agree to resolve disputes via arbitration. This contract forgoes the parties’ right to litigation and states that they will have an arbitrator reach a decision.
This contract often goes into effect before a disagreement arises, but it can also be an afterthought. No matter when it becomes effective, both parties must agree to sign it on their own. They cannot be forced or coerced.
The Federal Arbitration Act governs arbitration agreements, deeming them valid and irrevocable. This act doesn’t apply to contracts of some employees, including railroad workers and seafarers. States may also have their own laws regarding certain types of disputes that may be arbitrated.
When to Use an Arbitration Agreement
Arbitration agreements are common in the following circumstances:
- Employment contracts: For disputes over benefits, wages, and overtime pay.
- Consumer contracts: With banks, communication providers, and credit card companies.
- Personal injury claims: For resolving compensation disputes when agreed to in advance.
- Business contracts: For disagreements over terms or performance.
- Tort claims: For disputes involving negligence or wrongful acts, if covered by the original contract.
- Accusations of harassment or discrimination: For workplace-related conflicts.
These contracts are typically mutual, but they may be asymmetrical in some situations. For example, they may permit a company to go to court for some claims but demand that the consumer arbitrate their claims. Asymmetrical provisions will be scrutinized carefully, so be wary of one-sided contracts. If an arbitration agreement is determined invalid, either party may seek recourse through litigation instead.
Arbitration Agreements & Sexual Harassment Cases
Under 9 US Code § 402, claims involving sexual assault or sexual harassment cannot be subject to mandatory arbitration.
Why Use an Arbitration Agreement?
An arbitration agreement helps resolve disputes more quickly than court proceedings. In arbitration, a neutral third party receives information from both parties, who have access to legal counsel. They use what they learn to make a decision. The arbitrator’s decision (called an “award”) is final, so neither party can appeal it, except in very limited circumstances or if the parties agree in advance that the award is non-binding.
Explore the benefits of an arbitration agreement:
- Reduced costs: Arbitration prevents the need for litigation expenses.
- No jury trials: Arbitration helps avoid emotionally driven jury outcomes (known as jury nullification).
- Increased privacy: Court outcomes are public, but arbitration can allow the details of a case to remain confidential.
- More streamlined process: The parties give up their right to sue when they agree to arbitrate. They rely on a privately selected arbitrator to decide the outcome.
What to Include in an Arbitration Agreement
An arbitration agreement helps outline how the parties will resolve contention without going before a formal judge or jury. Here are the key elements to include for your contract to be effective and binding:
- Party classification: Arbitration agreements can be made between individuals, businesses, or both.
- Party information: State the parties’ legal names and addresses.
- Original agreement: Provide the date you and the other party entered the original contract. Attach a copy for reference.
- Jurisdiction: Name the city and state where the arbitration will occur. Clarify which jurisdiction’s laws will apply to the arbitration process.
- Agreement date: State the date the agreement will be executed.
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Arbitrator: You and the other party must agree on the criteria for selecting the arbitrator. Decide on the following factors:
- The field in which they should have expertise/experience
- The minimum number of years of experience you need them to have
- The minimum number of times they’ve served as an arbitrator before
- Statement to forgo litigation: Clearly explain that all parties will relinquish their right to sue.
- Costs: Allocate how the costs of the arbitrator will be apportioned between the parties.
Choosing the Arbitrator
Your arbitrator should be a neutral third party with no interest in the case. They should be fair and clarify each party’s rights before the arbitration begins.
Arbitration Agreement Sample
View our arbitration agreement sample below to learn how to structure your contract. When you’re ready, use our guided form to create your own and download it in PDF or Word format.
