An Arbitration Agreement is a written contract where two parties agree to settle any disagreements outside of court. Instead of going to court, arguments are determined through a private process called arbitration.
Arbitration Agreements are usually clauses contained within more critical legal documents such as an employment contract or terms and conditions, but they can also be stand-alone legal documents.
What is an Arbitration Agreement?
An Arbitration Agreement is a legal contract stipulating that any disagreements arising from business dealings will be handled outside of court. Both parties agree to forego litigation if a dispute stems from the business.
This agreement means both parties will enter arbitration to resolve a dispute, but you may wonder what that entails. The parties will hire legal counsel in litigation, which will occur in court.
A jury will hear proceedings 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.
Signing an Arbitration Agreement has benefits and drawbacks, so all parties must understand their agreement with these documents. These contracts are usually entered into before a business maps a resolution if there is a dispute.
They can also be drafted after establishing a business relationship, 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 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 agreement will address:
- What is 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 – 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:
- 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 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 dissuades 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 a claim for wrongful termination or discrimination. A benefit in this situation – if the arbitrator found 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’s 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 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 employees must 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 used for employees, they’re also used in other business dealings. Some common uses for these agreements include contracts in healthcare, construction, commerce, e-commerce, and insurance.
The Pros and Cons of Using An Arbitration Agreement
Sample Arbitration Agreement
Below is an Arbitration Agreement template available to download in PDF and Doc format.