Essentials of drafting arbitration agreements, from key provisions to practical tips, ensuring effective dispute resolution.
Legal glossary · Arbitration vs. litigation · Arbitration agreement
Arbitration agreements are common in most employment, business, and consumer contracts. An arbitration agreement is a cost-effective and proactive way to handle disputes. This process is confidential without the costs and headaches associated with litigation.
Attorneys are responsible for drafting arbitration agreements in contracts. This guide will help you learn relevant clauses to include, the benefits and disadvantages, and practical tips as you draft arbitration agreements for clients.
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What is an arbitration agreement?
Key provisions in an arbitration agreement
Practical tips for drafting an arbitration agreement
What is an arbitration agreement?
Black Law’s Dictionary defines an arbitration as a “process of dispute resolution in which a neutral third party (arbitrator) renders a decision after a hearing at which both parties have an an opportunity to be heard.”
An arbitration agreement essentially states that if a dispute occurs, the parties will resolve it through arbitration. Parties will agree to arbitrate the matter instead of litigating it in court.
(18c) An agreement by which the parties consent to resolve one or more disputes by arbitration. An arbitration agreement can consist of a clause in a contract or a stand-alone agreement and can be entered into either before a dispute has arisen between the parties (a predispute arbitration agreement) or after a dispute has arisen between the parties (a postdispute arbitration agreement or submission agreement).
12th ed. 2024
Key provisions in an arbitration agreement
Every arbitration has specific clause components. Keep in mind that this is a general starting point, and you should draft your arbitration agreement using a holistic approach with the parties’ needs at the forefront.
Individual clauses are drafted to protect parties if there is need for an arbitration.
Explicit intention to arbitrate
The parties involved in the contract must explicitly state that they agree to arbitrate should there be a dispute. Parties can agree that the arbitration award be entered as a final judgment with the court. This step can help with enforceability if one party decides not to comply with the arbitrator’s ruling.
Arbitration scope
The parties need to fully define the scope of the dispute that will be subject to arbitration. The agreement must define coverage so parties understand what issues are subject to arbitration. This language needs to be as specific as possible.
Governing laws
Make it clear what governing laws apply to the arbitration proceedings. This should be distinguishable from the contract. You must also explicitly address what governing law dictates the contract.
Procedural rules governing the arbitration
The agreement should identify what procedural rules will govern the arbitration. In addition, you should also identify the administering institution and you could choose the American Arbitration Association (AAA), International Chamber of Commerce (ICC), or others.
Venue
It is crucial to include the “seat” of the arbitration in your arbitration agreement. Venue doesn’t necessarily mean the location of the arbitration, but refers to the jurisdiction of your proceedings. When choosing a location, consider an arbitration-friendly venue since this will help with the enforceability of the judgment.
Selection of arbitrators
You should consider a few key things when choosing your arbitrator. You can choose a single arbitrator to keep costs reasonable. For more complex cases, you may want to choose more than one arbitrator. In these instances, the parties choose a panel of three arbitrators. Each party chooses their own arbitrator, and the two arbitrators choose the third.
In your agreement, specify if the arbitrator needs to have industry-specific knowledge or legal experience.
Arbitration costs
The agreement should specify how much each party should pay for the arbitration costs. You want costs to be fully transparent in the agreement so that financial disputes do not occur. You will want to take into account not only the arbitrator’s fees, but also the administrator’s fees and legal fees.
Time limits
Once a dispute arises, when will arbitration start? The agreement should list the specific time period in which an arbitration should begin following an unresolved dispute.
Confidentiality clause
Arbitration is confidential. Include a clause in the agreement that specifies that documents, proceedings, and final award be kept confidential. This clause is particularly key for those businesses that want to keep proprietary information private.
Finality clause
The agreement should provide a clause that states the arbitration is final and not subject to appeal. It must state that both parties will agree to the arbitrator’s decision.
Disadvantages
What are some of the cons of arbitration agreements? Here are four disadvantages of arbitration agreements:
No recourse through the appeal process
Arbitration agreements are final and not appealable. If you feel like the outcome is unfair, the arbitration agreement mandates that decisions are final. This is a disadvantage in case errors have occurred.
Enforceability problems
Although arbitration agreements are binding, sometimes enforceability is difficult. For example, enforceability issues may arise during attempts to enforce provisions internationally.
No jury process
Arbitration agreements will not allow parties to seek a jury trial. In certain complex disputes, some parties may view this as a disadvantage.
Arbitrator bias
Companies and individuals may gravitate toward the same arbitrator. This could be perceived as an inherent bias by the opposing party.
Practical tips for drafting an arbitration agreement
Here are three tips to keep in mind as you draft your arbitration agreement:
- Use straightforward words. Write simple language that is easy for both parties to understand. Avoid vague phrases in your arbitration agreement.
- Choose the official language of the arbitration. Specify the language you plan to use during the arbitration.
- Be specific about scope. Try to avoid ambiguity when defining the scope of your arbitration agreement.
More resources
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Practice notes
- Understanding US Arbitration Law
- Drafting Arbitration Agreements Calling for Arbitration in the US
- Procedural Steps in AAA Mass Arbitration
- Procedural Steps in JAMS Mass Arbitration
- Understanding the Federal Arbitration Act
Standard documents
Checklists
Toolkits
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