Arbitration clauses specify when arbitration is required for dispute resolution. In a contract, a clause defines the parties’ rights and options in the case of a legal dispute. Arbitration clauses typically forbid parties from suing one another. Rather than litigating, they resolve disputes through arbitration.
The arbitration will be used to resolve the parties’ differences instead of litigation. Additionally, they must reach an agreement on how to resolve this issue. Similar to a court case, the outcome could be a settlement payment. A majority of arbitrations are much more informal than litigation. Furthermore, disputing parties can discuss remedies according to their terms in arbitration.
Which Arbitration Clauses Are Binding and Which Are Nonbinding?
There are two types of arbitration clauses: binding and non-binding. A binding arbitration agreement means the arbitrator will have the final say in a particular dispute. Any appeal or disregard of the ruling by either party will not be allowed, and the ruling will be enforced.
Disputes can, however, be resolved without binding arbitration if the parties agree to a non-binding arbitration clause. If the dispute cannot be settled through arbitration, the parties may take the case to court. It is generally preferred to have arbitration clauses that impose binding obligations since they are more decisive and require less time.
What Should Be Included in an Arbitration Clause? What Happens If It’s Violated?
Arbitration clauses typically state: “The parties agree that any legal disputes should be resolved through arbitration rather than civil litigation.”. Arbitration clauses can be tailored to the dispute resolution needs of disputing parties.
It’s best to include specific arbitration clauses whenever possible. They should, for instance, state:
- Provide information about the parties involved in the clause;
When the clause will take effect and when it will end, if ever;
Whether the clause can be modified in the future; and
- The clause has consequences for violations.
When one party files a lawsuit, disregarding the fact that they agreed to resolve disputes through arbitration, an arbitration clause is commonly violated. With an arbitration clause included in a contract, the parties forfeit their right to sue. This would be illegal.
The non-violating party may present any papers served against them as an arbitration clause to the judge. If the judge finds that the arbitration clause is valid, the parties may be directed to pursue arbitration according to its instructions. Arbitration clauses stipulate that parties suing one another will have their rights and benefits terminated if they violate them.
What Are the Advantages and Disadvantages of Arbitration Clauses?
There are advantages and disadvantages to including an arbitration clause in a contract. Arbitration is generally a more efficient and faster way of resolving disputes than court. Therefore, courtroom procedures are avoided and there is less technical detail. Another benefit of arbitration is its flexibility. Rather than have the court set specific dates for parties to settle their disputes, the courts allow parties to choose when they want to settle their disputes.
The disputing parties may also choose arbitrators. This can ensure that the arbitrator has a clear understanding of the issues at stake. This would be opposed to having a judge make a decision when they lack experience in either field.
Arbitration has several advantages, but it also has several disadvantages. One of the biggest disadvantages of arbitration is that once a ruling has been made, it becomes final and binding. A court ruling may be appealed, but not arbitration decisions. To appeal or overturn an arbitration decision, a party must show that the arbitrator acted unfairly. Therefore, the arbitrator violated public policy.
As part of arbitration proceedings, the disputing parties are not compelled to exchange information automatically. The arbitral contract must include a discovery provision.