What is an Arbitration Agreement
An arbitration agreement provides that two or more people will submit an existing or future dispute to arbitration. Arbitration allows a dispute to be decided by one or more persons (the “arbiters” or “arbitrators”) selected by the parties to the dispute instead of decided by a judge or jury in the court system. Arbitration agreements are most commonly made “prospectively” (meaning parties agree to arbitrate any future disputes) but can also be made “retrospectively” (meaning parties agree to arbitrate a dispute that has already arisen).
Arbitration agreements can be mandatory (the parties are required to seek arbitration as the exclusive means of resolving disputes) or voluntary (parties can seek arbitration of disputes but are not required to). Arbitration agreements can provide that the parties are compelled to abide by the decision of the arbiter (called “binding”) or provide that the arbiter’s decision is merely advisory).
The enforceability of arbitration agreements is governed by the Federal Arbitration Act and/or various state statutes and judicial decisions. For more information regarding the enforceability of arbitration agreements, see Enforceability of Arbitration Agreements.
Advantages of Arbitration Agreements
Some of the key advantages of arbitration agreements are:
- Speed: Arbitration provides a faster alternative to the judicial system.
- Cost: Arbitration can provided a less expensive alternative to litigation, particularly if the arbitration process selected avoids extensive discovery procedures and allows the parties to quickly address the merits of the dispute.
- Expertise: Arbitration allows the parties to select decision makers with expertise in the subject of the dispute.
- Flexibility: Arbitration allows the parties to design procedures that are tailored to their needs.
- Privacy: Arbitration proceedings are private; whereas, court proceedings are public.
- Finality: Arbitration awards are generally only appealable on a limited range of issues. Whereas, court decisions may be appealed for numerous reasons. This gives arbitration awards greater finality than court decisions
- International Enforceability: In disputes between citizens or entities from different nations, arbitration awards are often easier to enforce because of the existence of multiple international conventions on the enforceability of arbitral awards, most importantly the New York Convention of 1958.
Disadvantages of Arbitration Agreements
The potential disadvantages of arbitration agreements are:
- Arbitration Costs: Although money can often be saved using arbitration, the parties must pay for the arbiters.
- Risk of Erroneous Decision: Because it is more difficult to appeal an arbitration award, decisions a party finds “incorrect” are difficult to overturn.
- Repeat Player Advantage: Because some corporations will consistently arbitrate in the same forum and arbiters are paid to arbitrate, repeat players may have an inherit advantage in arbitrations.
- Lack of Pre-Judgment Authority: Courts have the ability to issue injunctions and take similar actions to avoid further damages and/or aid in the enforcement of a possible future judgment. Arbiters lack these powers. A particular problem here is the possibility that a party will divert assets or take other steps to frustrate a possible future award while the arbitration is proceeding.
- Not Directly Enforceable: Judgments awarded by a court are immediately enforceable. In contrast, an arbitration award must first be confirmed by a court before it is enforceable.
Common Elements of an Arbitration Agreement
The following is a summary of the issues that an arbitration agreement should generally address:
- Scope: What issues are subject to arbitration?
- Process: What process will be used to arbitrate disputes? Will the parties utilize a single arbiter or a three person panel? What qualifications will the arbiter have? What rules will be used for the arbitration? How much discovery will be allowed and how will it be conducted? When will the arbitration occur and how long will it last? What evidentiary rules will apply? Often parties elect to adopt the rules of a well known arbitration tribunal, such as the American Arbitration Association.
- Privacy/Confidentiality: Parties may want to include a clause keeping the existence and result of any arbitration and/or information divulged during arbitration confidential.
- Remedies: What range of remedies will be available in arbitration? Only an award of money damages? Before or during the arbitration, can parties go to court to seek an injunction?
- Choice of Law Clauses: What law will govern the arbitration? Are the arbiter’s decisions on matters of law binding or reviewable?
- Costs: How will the costs of the arbitration be paid?
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