An arbitration agreement is a written agreement where two parties agree to settle any disagreements outside of court. Instead of going to court, arguments are settled through a private process called arbitration.
Arbitration agreements are usually clauses contained within larger legal documents such as an employment contract or terms and conditions, but can also be stand-alone legal documents.
What is an Arbitration Agreement?
An Arbitration Agreement is a legal contract stipulating that any disagreements that might arise through business dealings will be handled outside of court. Basically, both parties are agreeing to forego litigation in the event that there’s a dispute stemming from the business.
What is Arbitration?
This agreement means that both parties will enter into arbitration to resolve a dispute, but you may wonder what that entails. In litigation, the parties will hire legal counsel and the process takes place in court. Proceedings will be heard by a jury unless the jury trial is waived in favor of a bench trial (where the judge makes the final determination).
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). This process is more informal than a court trial and often less expensive.
How Does Arbitration Work in Business?
It should be noted that you can also include a clause within a business contract. The clause might be only a few lines, but would stipulate that both parties agree to settle disagreements outside of court.
There are benefits and drawbacks to signing an Arbitration Agreement, so it’s important that all parties understand what they’re agreeing to with these documents. These contracts are usually entered into prior to a business dealing in order to map a resolution if there is a dispute. They can also be drafted after a business relationship has been established, often because the clause was foregone initially.
These agreements are used in dealings between business entities, businesses and consumers, and employers and their employees. Some concrete examples include:
- An employment agreement between a freelance writer and a marketing company
- An agreement to add a new partner for an LLC (LLC Operating Agreement)
- A construction company and real estate firm agreeing on a joint venture for a new apartment building.
How Do Arbitration Agreements Work?
These agreements can cover a wide gamut of issues that may arise after signing a contract. Often they will stipulate that any issue that’s covered under the original contract is subject to arbitration, rather than litigation. In some cases, they can be written to cover only specific issues. Here are a few questions that a well-drafted agreement will address:
- What is the scope of the possible dispute? It will specify what types of disagreements will be settled in arbitration. Often they are written widely to cover unforeseeable events. But it should be phrased specifically 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 especially used in conjunction with important to stipulate the location.
- What rules apply to arbitration? Your agreement specifies whether the process is conducted by a recognized arbitration association or under the rules 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 – arbitration can take place 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 that an arbitrator must meet. It can also lay out each party’s input in the process of choosing 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? With litigation, confidentiality is not possible because everything becomes part of a public court record, including testimony. In arbitration, there is no public record which makes it inherently more confidential. In sensitive cases, you may want to include specifications on confidentiality to ensure that the information is not disseminated by either party.
Is an Arbitration Agreement Right for You?
A business might decide to use this agreement for a number of reasons. 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. For business partnerships and employees, this agreement streamlines the process of dealing with breaches of contract or other business disputes.
These are a few areas where this agreement can benefit your company:
- 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 individual people might have their own biases against corporations and for individual customers or employees. This contract can stipulate that any disagreements must be settled by a judge or arbitrator, which tends to offer a more fair, unbiased view.
- 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 tends to dissuade people from filing needless claims.
- Faster procedure with less red tape: This process is far more casual than a legal suit. It takes less time and often will be easier to prepare for and finalize. This option saves time and money.
- Wrongful termination and discrimination suits: If an employee signs this agreement, they can’t bring suit for wrongful termination or discrimination. A benefit in this situation – if the arbitrator found for the past employee, the process would not be in public court records and the company could add clauses to enforce confidentiality so that the company reputation is protected. However, while the employee could not bring a formal suit against the company, they could enlist the help of a government agency to file suit on their behalf.
What Does this Agreement Mean for Signatories?
Arbitration is the most common form of dispute resolution in employment contracts. This might be a separate agreement or a clause in an employee contract. Sometimes this agreement is simply included in the employee handbook or other hiring materials that the employee signs before starting their tenure with the company. Today, these clauses are fairly standard in most employee contracts. Though it is important that employees understand what rights they’re waiving. On the surface, this seems to favor the company. But there are benefits for the employee, as well.
While these contracts are commonly in use for employees, they’re also used in other types of business dealings. Some standard uses for these agreements include contracts in healthcare, construction, commerce, ecommerce, and insurance.
The Pros and Cons of Using An Arbitration Agreement
Pros of Signing Arbitration Agreements
- Obtaining employment. While this is of small benefit, many employers will not hire a prospective employee who will not sign an Arbitration Agreement.
- Arbitration is faster than a legal case. In the event that there is a dispute, the resolution takes less time than court proceedings.
- Arbitration is a fair process. Of course, an agreement is drafted to protect the company or organization from litigation costs but it’s also a fair proceeding. The arbitrator will be skilled and should be unbiased – employees and customers can ask for disclosure agreements to make certain arbitrators have no stake in the proceedings. You also have a say in who the arbitrator will be.
- There is no public court record. For obvious reasons, employees who file suit against a previous employer may have a more difficult time finding future employment. Without litigation, there’s no public record of a dispute and no reason to disclose the information to future employers.
Cons of Signing Arbitration Agreements
- If you’re an employee working at a company, it won’t allow you to personally seek a settlement for wrongful termination. If you feel the employer did something unethical or illegal, you might not want to waive this right.
- You waive your right to a jury trial. In the event you have a dispute, juries are traditionally more in favor of the employee or consumer than they are of large corporations or organizations.
- Disclosure can be less inclusive. With mediation, records may not be as obtainable as they would be in a formal court case where documents can be requested or subpoenaed. This might make proving your side of the dispute more difficult.
This agreement can be specifically tailored to your business or dealings to protect your company from litigation costs. Other options include adding clauses to the initial contract. It is important that the right language is used so that the scope of arbitration isn’t so wide that it becomes unenforceable.
Sample Arbitration Agreement
Below is a sample arbitration agreement available to download in PDF and Doc format.
Arbitration Agreement
