What is an Arbitration Contract?
An arbitration contract is a written agreement executed by two or more parties to resolve potential or existing disputes by arbitration. Arbitration is a legal method where a neutral third party (the arbitrator) hears the position of disputing parties and either accepts one allegation or the other. In essence, an arbitration contract is an alternative dispute resolution (ADR) to court litigation . Litigation tends to be a lengthy, expensive, and public process. The results of litigation are therefore public. Since arbitration contracts are private agreements, no one outside the arbitration knows the particulars, progress, or result of the arbitration unless the parties involved divulge. As such, arbitration is a desirable method of dispute resolution to many parties.
Essential Elements of an Arbitration Contract
The arbitration processes, whether statutory or contractual, must be conducted in accordance with certain provisions, which shall be identified as essential components or elements of an arbitration contract or agreement. Those key components include the parties, the arbitration clause, governing rules, and arbitration procedure to resolve disputes. The technical aspect of each may differ, however the aforementioned key components remain constant. With this in mind, it is important to acknowledge what should be included in a sample arbitration contract or agreement. It is also worth mentioning that the agreement must be voluntary and both parties must agree to it. Each party should have the opportunity to consult an attorney prior to signing the contract.
Benefits of Arbitration Contracts
The reasons for using arbitration or mediation as opposed to litigation are both practical and rational. A good portion of the practical advantage is due to what is established in the contract itself, and how a skilled attorney can make the most of it in a mediation or arbitration. The contracts establish a framework that tries to eliminate the need for court action, or at the very least pressure the parties to reach a settlement before it becomes too costly and time consuming to continue the process. However, there are other practical advantages as well that are specific to arbitration contracts.
Arbitration is generally considered both speedier and less costly than a regular trial. In the 2008 survey on commercial arbitration by the International Chamber of Commerce in Paris, Switzerland, cases were resolved in an average of 10.7 months. In England and Wales, it takes about 8 months to resolve cases, according to the reports from the London Court of International Arbitration. This is in contrast to a civil court case, where a significant number of cases will last a year and some run for years.
Confidentiality is generally guaranteed with arbitration. It is understood in the industry that an arbitrator will not discuss the case with anyone not involved in the case, and the same is expected from both the parties and their attorneys. Compared to issues that could be brought out in a court case (where there is often risk of publicity and outlandish claims), confidentiality may as well be an iron-clad rule in arbitration. While this is not a guarantee, and depends on the parties involved in the case, the expectation is always there and is based into the process.
The commercial nature of arbitration permits an arbitrator with complete expertise in the industry. In court trials, especially with civil cases, the judge may have little expertise in the area of the dispute. Not necessarily so with arbitration. The International Institute for Conflict Prevention and Resolution in New York (CPR) has a searchable database of arbitrators, along with lists of experts in various fields, as well as mediators. This allows the parties to the dispute the ability to choose one person with knowledge and expertise in the area of dispute to serve as the arbitrator.
Long-term objectives are less likely to be undermined during arbitration than they would in a trial. Since the identity of arbitrators are known in advance, and since arbitrators are not interested in having their careers disrupted by an avaricious trial, most arbitrators are invested in a long-term objective of having the parties return for their next issue to be resolved. Therefore, in most cases, an arbitrator is not going to "stick it to" one side or another, since both sides can make it harder to settle future disputes.
The prospect of an appeal is minuscule. There are allowances for an arbitration award to be vacated or reversed if there is clearly demonstrated corruption or bias, but this is very rare. Supreme Court Justice Scalia calls arbitration "the most common form of relief for corporate disputes." It used to be that companies had more leverage in this area, exploiting weaknesses in the process, but the process of arbitration has undergone significant reform, and the use of arbitration agreements is, in almost all cases, binding.
All of these advantages demonstrate just how useful an arbitration contract sample may be in order to seal a deal and keep things honest.
Common Mistakes in Arbitration Contracts
When it comes to arbitration clauses and contracts, there is no one size fits all. Parties need to be careful not to mistakes in their arbitration contracts that could make them unenforceable or difficult to prove as valid contracts. Below are some of the common pitfalls of an arbitration contract:
Scalar ambiguity – This means that a relative statement, such as ”a reasonable price" can mean different things to different people, and therefore can become unclear. This is why contracts are so detailed about specific terms; by clearly defining what specific things such as prices mean it is much easier for both parties to interpret them the same way.
Unclear parties – courts like to know specific parties are entering into contracts. Saying ”a corporation" where a specific corporation or name should go is fairly vague, and could be considered as scalar ambiguity.
Lack of consideration- this is the part of a contract that says what each party to a contract will get in exchange for fulfilling their obligations. An example would be a service in exchange for money. Without consideration, a contract is void. Arbitration is also a type of consideration in this type of contract, so ensuring that both parties commit to using it is important.
Circumstances out of parties’ controls – sometimes outside forces can stop parties from following through with their side of the deal. For instance, if part of the deal for an arbitration contract was that one party would submit all documentation by a certain date, but their office flooded that caused them to lose all documents, that would be out of their control. However, they would still be expected to have kept copies of the documents, and follow through.
Examples of Arbitration Contract Clauses
While drafting an arbitration contract can be a daunting task for many, there are certain sample clauses that can be utilized to simplify and expedite the process. While these sample clauses are only intended as a guide, they should serve the function of providing guidance in the drafting process.
The parties to the contract include a provision that provides:
Arbitration
All disputes arising out of the interpretation, performance, or breach of this agreement, or any other dispute among them, shall be settled by binding arbitration before a single arbitrator appointed by agreement of the parties, or, if the parties cannot agree, by the American Arbitration Association, under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator may be entered in an appropriate court. The parties further agree that the arbitrator shall have the authority to award full relief and damages available in courts of general jurisdiction, but shall not have the authority to award punitive damages or make any award that is inconsistent with the express terms of the agreements of the parties. The arbitration shall be held at__________ (insert desired location) .
The parties shall each bear the cost of preparing and presenting their own case, and share equally in the payment of the costs of arbitration, including the arbitrator’s fees, unless otherwise agreed by the parties or ordered by the arbitrator. In reaching any decision under this arbitration clause, the arbitrator shall apply the legal rules of_______________(designate state).
Second Sample Provision
Arbitration
All disputes arising from or related in any way to this agreement or the subject matter thereof (including, without limitation, any dispute relating to compensation) shall be resolved by arbitration before the American Arbitration Association or its successor pursuant to the then current rules of said Association upon the written request of either party, which request shall be deemed to have been received by the other party within the meaning of this agreement two (2) days after being sent by registered mail, return receipt requested, addressed to such other party at its last known address. Venue shall be in the county of ____, state of ____.
The undersigned parties acknowledge that they have read and understand this Arbitration provision and consent hereto.
Ways to Personalize an Arbitration Contract Example
In order to customize a sample arbitration contract, parties must first identify any unique provisions relevant to their specific dispute. It is important to consider any specific laws of their jurisdiction as well as particularities of their industry that may affect the form and manner of arbitration. For example, some industries or jurisdictions require confidentiality obligations or additional documentation for an arbitration.
Next, parties should carefully review each section of the sample contract to determine what alterations are necessary. Some changes may be minor, such as the names and contact details of the parties and their respective legal representatives, while others may be more substantial, like the choice of rules and the selection of the arbitrator or panel of arbitrators. It is essential for parties to examine the nature of their dispute and then address any logistical concerns in the contractual language beforehand.
Finally, it may be beneficial for parties to seek professional legal advice when customizing a sample arbitration contract. This is especially true if they are unfamiliar with the arbitration process or the appropriate legal standards in their jurisdiction. Legal counsel can help ensure that all necessary provisions are included and that any alterations do not contravene applicable laws or industry regulations.
Legal Requirements and Conformity
In the sphere of arbitration contracts, the intricacies of legal considerations and compliance often act as the invisible hand that guides the development and applicability of the contract. To that end, choosing the right jurisdiction is of paramount importance. Each jurisdiction operates under a body of national arbitration laws that have a direct impact on the interpretation and enforcement of arbitration agreements. The law of the seat identifies the state in which the arbitration will predominantly take place, influencing numerous factors such as the selection of arbitrators, arbitration procedure, and other administrative considerations.
Just as important are the national precepts governing arbitral awards. These may be traced to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) and the UNCITRAL Model Law on International Commercial Arbitration (1985). The scope of enforcement assistance , including enforcement in a third-party jurisdiction, can be far-reaching. This is merely a reflection of the very purpose of arbitration, where disputes are resolved by a tribunal with specialisations in the issues at hand. The degree to which courts are prepared to interfere with the arbitration process varies from jurisdiction to jurisdiction.
Compliance with both the contract and the law is imperative. Non-compliance set up jurisdictional hurdles when seeking enforcement in a state. For example, if the seat of arbitration is Peru, the choice of language for the arbitration may be mandated to be Spanish regardless of the fact that the parties may be multinational entities comfortable communicating in different languages. National arbitration law may also require the contract to stipulate the extent of an award’s finality. It is common practice in arbitration to contract out the right to appeal the determination, albeit that such a decision cannot be reviewed by a court of law.
