An arbitration agreement is a written contract where two parties agree to settle any disagreements outside of court. Instead of going to court, the parties determine a solution through a private process called arbitration.
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Sometimes, arbitration agreements are clauses within other legal documents, like employment contracts or terms and conditions agreements. However, they can also be stand-alone legal documents.
What Is an Arbitration Agreement?
An arbitration agreement is a legal contract stipulating that any disagreements will be handled outside of court. Both parties agree to forego litigation if a dispute stems from the business.
With arbitration, there is no courtroom involved. It’s often handled in a meeting room rather than a courtroom. Both parties are entitled to legal representation during the process. There may also be witnesses and testimony heard, and both sides will have the opportunity to have discovery (or see any evidence provided by the other party).
Arbitration is more informal than a court trial and often less expensive.
When to Use an Arbitration Agreement
Arbitration agreements can be useful in many business situations, but they’re especially common for employer-employee relationships. Establishing an arbitration agreement ahead of time can help in case the following situations arise:
- Tort claims
- Disputes over benefits, wages, and overtime pay
- Breach of contract
- Accusations of harassment, retaliation, or discrimination
- Personal injury claims
How Do Arbitration Agreements Work?
These agreements can cover various issues arising after signing a contract. In some cases, they can be written to cover only specific issues. Often, they stipulate that any issue covered under the original contract is subject to arbitration rather than litigation.
Here are a few questions that a well-drafted arbitration agreement will address:
- What’s the scope of the possible dispute? It will specify what disagreements will be settled in arbitration. Often, they are written widely to cover unforeseeable events. But it should be explicitly phrased enough that it’s enforceable.
- Where does the arbitration take place? The seat of arbitration is the actual location. For those doing business remotely, on a national or international scale, it’s mainly used in conjunction with stipulating the area.
- What rules apply to arbitration? Your agreement specifies whether the process is conducted by a recognized arbitration association or under the regulations that apply to that institution’s guidelines. It can also be conducted through agreed-upon rules that may be your own. You should also note which state or country’s laws will apply, as arbitration can occur in one location while following the laws of another.
- How many arbitrators are specified? Your contract outlines the number of arbitrators who will oversee the process.
- How are arbitrators chosen? The agreement can specify how the arbitrator is chosen and outline specific criteria an arbitrator must meet. It can also lay out each party’s input in selecting an arbitrator. If using a single arbitrator, all parties must agree on the arbitrator. If parties can’t agree, they are chosen according to the rules of the arbitration association.
- Are details of the proceedings confidential? Confidentiality is impossible with litigation because everything becomes part of a public court record, including testimony. There is no public record in arbitration, making it inherently more confidential. In sensitive cases, you may want to include specifications on confidentiality to ensure that either party does not disseminate the information.
Is an Arbitration Agreement Right for You?
A business might decide to use this agreement for several reasons. For business partnerships and employees, this agreement streamlines the process of dealing with breaches of contracts or other business disputes. For businesses that sell services or products to the public, it can protect them from frivolous litigation and simplify the process if there is a dispute.
These are a few areas where this agreement can benefit your company:
- Offers protection from class-action suits: If your company sells something of minimum value, a customer is less likely to file a lawsuit because it’s cost-prohibitive. Class action suits might be brought for these small amounts when many customers are notified of the possibility that they are eligible for damages.
- Waives the right to a jury trial: A jury trial might be exceptionally detrimental for a company because individuals might have biases against corporations and for individual customers or employees. This contract can stipulate that any disagreements must be settled by an arbitrator, which tends to offer a more fair, unbiased view.
- Allows for the recovery of attorney fees: They can stipulate that providing you win the case, the losing party must pay the other party’s legal fees. This can also be a sought restitution in court, but litigation tends to drag on longer and cost far more. In any event, this clause dissuades people from filing needless claims.
Considerations for Arbitration
Review some considerations for arbitration so you can implement this policy effectively:
- The arbitrator should be fair. The arbitrator should produce an outcome similar to the outcome if the case were to go to court.
- The arbitrator should be neutral. The arbitrator shouldn’t have any conflicts of interest.
- The agreement should clarify the parties’ rights. Before entering an arbitration agreement, all parties should understand their right to consult with an attorney if they must undergo the arbitration process.
Arbitration Agreement Sample
View our arbitration agreement template below, which is available to download in PDF or Word format: