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What is an arbitration clause?

What Is an Arbitration Clause?

An arbitration clause is a section of a contract that deals with the parties’ rights and options within the event of a legal dispute over the contract. In most arbitration clauses, the parties agree to not sue one another and instead will resolve their disputes through arbitration. Arbitration is a process that enables a third-party arbitrator to assist with discussions between the parties.
Rather than sue one another, the parties will just see their differences during these arbitration sessions and reach a mutual agreement about how the matter is to be resolved. This might cause remedies kind of like what a court might issue, like a settlement payment. The difference is that arbitration is far more flexible and informal and allows the parties to debate the remedies on their own terms.

Difference Between a Binding and Nonbinding Arbitration Clause?

A clause may be binding or nonbinding. A binding clause implies that the arbitrator's decision on a particular dispute is final and also the courts will enforce it and neither party can appeal or not follow the choice. A non-binding clause allows parties to be liberal to reject the arbitrator's decision and take the dispute to court to form a final determination. Usually, parties use the binding arbitration clauses since they are more decisive and they make things go faster.

Who Can Arbitrate Disputes?

The arbitration may be voluntarily agreed by the parties to the transaction or maybe mandatorily required by the courts. Most contract arbitration occurs because the parties included a clause within the contract that required them to arbitrate any disputes that arise under the contract. If there's no clause included within the parties contract agreement, the parties should still comply with arbitration if they both comply with attending an arbitration session to resolve the dispute instead of having the courts make a determination.

What Are the Advantage and downsides of an Arbitration Clause?

There are few advantages and downsides to including a clause during a contract to resolve disputes that arise under a contract:

Advantages: Arbitrations are usually faster and more efficient than visiting the court to resolve the dispute because it avoids courtroom procedures and is a smaller amount of technical. Arbitrations also can be very flexible and also the parties can find their own times to settle the dispute instead of having the court give them specific dates to attend. The parties can also choose an arbitrator that has more technical knowledge within the issue that they're disputing over instead of having a judge who has no experience in either area to present a ruling.

Disadvantages: The disadvantages of arbitration is that after a ruling or determination has been made, the choice becomes final and binding. Unlike the court ruling, arbitration decisions can not be appealed. the sole way that an arbitration decision may be appealed or put aside is that if a celebration proves that the arbitrator was biased or unfair when making the choice and as a result violated some style of public policy. additionally, arbitrations don't have an automatic discovery process where parties are required to exchange information. Parties must comply with include a discovery requirement in their clause. Finally, arbitrations are usually more costly and expensive than court litigations.

What Should Be Contained in an Arbitration Clause?

Contract arbitration clauses usually contain language like "The parties to the current contract hereby comply with resolve legal disputes through arbitration methods instead of civil lawsuits". The clause is also tailored exactly to how the parties need it to be. Such clauses should be specific and will contain information such as:

Information regarding which parties are plagued by the clause

When the clause will get in effect, and when it'll terminate (if ever)

Whether the clause may be modified within the future

Consequences of violating the clause

The way that a clause is violated is, of course, if one amongst the parties seeks to file a lawsuit while they agreed to settle disputes through arbitration. In essence, the parties forfeit their right to file a lawsuit with a clause.

The non-suing party is also ready to present the clause to the judge in response to any papers that are served against them. If the clause is found to be valid, the judge may order the parties to pursue arbitration consistent with the instructions contained within the clause.

In many cases, the parties agree that their contract rights and benefits are extinguished if they violate the clause by attempting to sue the opposite party.


  • Arbitration
  • Need of a lawyer
  • Cost

BY : Anubhav Verma

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