What Is an Arbitration Agreement?

Updated July 19, 2023
8 min read
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Introduction

Arbitration is governed by federal and state law, and each state has its own arbitration rules. These rules establish procedures for the confirmation of an arbitrator’s award, a process that gives an award the force and effect of a judgment after a trial. Although some states have individual arbitration rules, most have adopted the Uniform Arbitration Act.

What Is Arbitration?

Arbitration is a method of resolving disputes. An arbitrator is an independent third party who decides a dispute privately. The parties in the dispute usually hire either a single arbitrator or a panel of arbitrators to conduct an arbitration hearing. The number of arbitrators can be variable, although some legal systems insist on an odd number to avoid ties. Most tribunals have between one and three arbitrators.

Arbitrators are appointed by disputing parties, making arbitration an alternative to litigation (court action) and just as final and binding (unlike mediation, negotiation, or conciliation).

What Is an Arbitration Agreement?

Arbitration can only proceed if both parties agree to it. It is common to sign an arbitration agreement at the start of a contractual relationship, such as an employee/employer relationship or a business contract position.

The arbitration agreements are typically found within employee handbooks or employment contracts under headings such as “Arbitration” or “Dispute Resolution,” or at the end of larger contracts. These clauses generally require binding arbitration for all disputes arising from the primary contract, but some designate only certain disputes for arbitration.

In some instances, arbitration can also be agreed to after a lawsuit has been filed or a conflict has arisen. These agreements can also prescribe the arbitration rules, the number of arbitrators, and the process for choosing them.

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Benefits of Arbitration

The arbitration process is a private trial paid for by the parties, thus avoiding court proceedings. A neutral third-party arbitrator will resolve the dispute instead of the courts. Attorneys for both sides will often make oral arguments, though the presentation may be just documented, unlike a court bench or jury trial. To understand the advantages and disadvantages of arbitration, read the following.

Pros of Arbitration
  1. Objectivity: Arbitrators are usually picked jointly by parties to the dispute, so both parties have confidence that the arbitrator will be impartial and unbiased.

  2. Privacy: In contrast to a trial, arbitration leads to a private resolution, so the details of the dispute and the resolution can remain confidential. A well-known public figure or a client in a business dispute might find this enticing because all evidence, statements, and arguments will be confidential. Even if certain records are not released, there is still a risk that some sensitive business information will be made public in court.

  3. Faster resolution and easier scheduling: Disputes are usually resolved sooner. Obtaining a court trial date can take several years, whereas an arbitration date can usually be achieved in a few months. A trial must be scheduled on a court calendar, usually behind schedule, without hundreds, if not thousands of cases. Arbitration hearings, however, can be conveniently scheduled when the parties and arbitrators are available.

  4. Simplified evidence rules and procedures: Litigation will inevitably involve filing papers and motions and attending court processes such as motion hearings. When it comes to arbitration, the usual rules of evidence are not strictly applied, making it easier to admit the evidence. In arbitration, discovery, which involves taking and answering interrogatories, depositions, and requests for documents, may be greatly reduced. Most issues, such as who will be called a witness and what documents must be produced, are resolved by phone calls with the arbitrator.

  5. Less expensive: Arbitration typically costs less than litigation, but not always. Lawyer fees are reduced as arbitration is more timely than court proceedings. Preparation for arbitration is less costly than a jury trial.

  6. Dispute is over sooner: In binding arbitration, the appeals process is limited. Arbitration gets finality, which is not always possible with a trial decision, which can be appealed, retried, and appealed again.

  7. A class action waiver is beneficial for employers: Recently, the United States Supreme Court confirmed that class action waivers could be included in arbitration agreements. To limit the risk of exposure, employers increasingly included a class action waiver in employment agreements.
Cons of Arbitration
  1. Poor transparency: Hearings are generally held in private, which is a plus for many. Nevertheless, this lack of transparency may cause the process to be biased since courts infrequently review arbitration decisions.

  2. Costly: Arbitration can be more expensive than litigation in many cases. Good arbitrators can charge substantial fees. An award or decision in non-binding arbitration is not ‘binding,’ and the parties are free to take their issue back to court, essentially adding the cost of litigation to the cost of arbitration. Employers must pay the arbitrator’s fees in full. For employment law cases, arbitrators’ fees can be very high.

  3. Subjective arbitration: Arbitrators are not always chosen objectively. Arbitrators may be biased by their association with one party or by being chosen from an agency. In such cases, neutrality is lost.

  4. Following the law arbitrarily: Arbitrators are generally required to follow the law, but the standards used are unclear. If the arbitrators are not strictly following the law, they may consider the “apparent fairness” of the respective positions. When reading the law strictly, your party will be favored.

  5. Questionable fairness: The parties are not allowed to choose arbitration by mutual consent if arbitration is mandated by contract. If one party wants to force arbitration, a jury trial may be more advantageous.

  6. No jury: In most cases, having a jury prevents biases and unfairness. An arbitrator acts as both judge and jury, eliminating juries completely.

  7. Unbalanced: Large employers and manufacturers often benefit from arbitration clauses when challenged by employees or consumers who don’t understand how arbitration works.

  8. Unconventional outcomes: Courtroom trials follow formal rules of procedure and evidence, but arbitration does not. A jury or judge may consider some evidence, but not an arbitrator. A judge or jury may not consider evidence that an arbitrator finds, which could damage your case. A witness’ testimony cannot be cross-examined if documents provide certain information.

  9. No appeals: The arbitration decision may be favorable for you, but you should be aware of the fact that both sides give up their right to appeal. One party has a very limited chance of correcting an erroneous decision.

You may be surprised by an arbitrator’s rulings or unconventional solutions. This can be a pro or con, so consider carefully how this will affect your decision.

What Is a Binding Arbitration Agreement

Binding arbitration involves submitting a dispute to a neutral party who handles the case, replacing a traditional jury or judge trial.

Concluding, parties resort to arbitration instead of court action when they agree they cannot resolve a dispute on their own and seek an imposed settlement that's binding.

For legal needs such as creating a legally binding arbitration agreement, you may use a template provider, like Lawrina, which offers a range of other business-related templates

For example, in accordance with the Federal Arbitration Act (FAA) in the US, a valid arbitration agreement allows private parties to agree that an arbitrator, rather than a court, will resolve disputes between them. The FAA also states that arbitration awards are final and binding upon the parties and that courts must enforce them, subject to a very limited number of exceptions.

Conclusion

Instead of engaging in a lawsuit or trial, a dispute should be submitted to arbitration when all parties agree. These parties have probably decided that they cannot resolve the dispute themselves and that outside mediators or conciliators will not assist them. Therefore, they would like someone else to impose an agreement binding on them, whether or not they like the decision. So get yourself a legally binding arbitration agreement or seek the services of lawyers near you to get expert advice.

Article by
Yevheniia Savchenko
Lawrina

Yevheniia Savchenko is a Product Content Manager at Lawrina. Yevheniia creates user interface copies for Lawrina products, writes release notes, and helps customers get the best user experience from all Lawrina products. Also, Yevheniia is in charge of creating helpful content on legal template pages (Lawrina Templates) and up-to-date information on US law (Lawrina Guides). In her spare time, Yevheniia takes up swimming, travels, and goes for a walk in her home city.

If you have any questions or suggestions regarding the product or UX content for Lawrina, feel free to contact Yevheniia directly at y.savchenko@lawrina.org or connect with her on LinkedIn.

Frequently Asked Questions

What laws govern arbitration?

Arbitration in the United States is primarily governed by federal law - specifically, the Federal Arbitration Act (FAA) enacted in 1925. The FAA provides the necessary legal framework for arbitration and ensures that arbitration agreements are "valid, irrevocable, and enforceable". This is to prove that arbitration agreements are treated like other contracts under US law. While FAA governs arbitration on a federal level, each state also has its own arbitration laws — some of which have adopted the Uniform Arbitration Act. As such, both federal and state laws can apply to arbitration, depending on the nature and scope of the dispute.

How is arbitration different from other methods of dispute resolution?

Arbitration differs from other forms of dispute resolution in several key aspects. Unlike litigation, which involves a formal court process, arbitration is a more informal procedure where both sides present their case to a neutral party (the arbitrator). The decision of the arbitrator often agreed to be binding by both parties, is typically final and not subject to appeal. This differs from court proceedings, where the decision can be appealed. Unlike mediation and conciliation, which involve a third party facilitating a resolution between the disputing parties, arbitration results in a definitive decision by the arbitrator. So, while arbitration is less formal than litigation, it's more definitive than mediation and conciliation.

What is the difference between binding and non-binding arbitration?

The difference between binding and non-binding arbitration lies in the enforceability of the arbitrator's decision. In binding arbitration, the arbitrator's decision is final and cannot be appealed or taken to court. This means that the parties are legally bound to follow the arbitrator’s decision. 

 

An example under US law is provided by the FAA, which mandates that an arbitrator's award must be enforced by courts, with very limited exceptions. 

 

On the other hand, in non-binding arbitration, the arbitrator's decision serves more as a recommendation. Either party can choose to reject the decision and take the dispute to court. However, the arbitrator's recommendation may still be used as a guide in subsequent legal proceedings.