Agreement to arbitrate: Overview, definition, and example
What is an agreement to arbitrate?
An agreement to arbitrate is a contract clause where the parties agree to resolve disputes through arbitration instead of going to court. Arbitration is a private dispute resolution process where a neutral third party (the arbitrator) makes a binding decision. It is often faster, less expensive, and more confidential than traditional litigation.
For example, if a software company and a client include an arbitration agreement in their contract, any disputes over services or payments must be resolved through arbitration rather than a lawsuit.
Why is an agreement to arbitrate important?
An agreement to arbitrate is important because it provides a clear and efficient way to handle disputes. Arbitration can reduce legal costs, speed up dispute resolution, and maintain privacy by keeping conflicts out of public court records.
For businesses, arbitration also offers flexibility in choosing arbitrators and procedures that suit their industry. However, arbitration decisions are typically final and harder to appeal than court rulings, making it important to carefully consider the pros and cons before agreeing to arbitration.
Understanding an agreement to arbitrate through an example
A Business Contract Dispute
A marketing agency signs a contract with a retailer that includes an arbitration clause. Later, the retailer refuses to pay for completed work, and the agency wants to take legal action. Because of the arbitration agreement, the dispute must be settled through arbitration, where an arbitrator hears both sides and makes a binding decision.
An Employment Dispute
A company includes an arbitration agreement in an employee’s contract. If the employee later claims wrongful termination, they must resolve the issue through arbitration instead of suing in court. This helps the employer avoid a lengthy and public legal battle.
An example of an agreement to arbitrate clause
Here’s how this clause might appear in a contract:
“Any dispute, claim, or controversy arising out of or relating to this Agreement shall be resolved by binding arbitration in accordance with the rules of [Arbitration Institution]. The decision of the arbitrator(s) shall be final and enforceable in any court of competent jurisdiction.”
Conclusion
An agreement to arbitrate ensures that disputes are resolved privately and efficiently, often saving time and legal costs. Many businesses prefer arbitration because it provides a structured resolution process while avoiding lengthy court proceedings. However, because arbitration decisions are usually final, it’s important to understand the implications before agreeing to arbitrate disputes.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.