What Is a Arbitration?

Plain-English Explanation

An arbitration clause is a part of a contract that says if there is a disagreement between the people who signed the contract, they will solve it outside of court. Instead of going to a judge, they will meet with a neutral person called an arbitrator. This person listens to both sides and then makes a decision.

Arbitration is usually less formal than a court trial. It can be faster and less expensive. The process involves both parties presenting their side of the story, and the arbitrator makes a decision based on what they hear.

Once the arbitrator makes a decision, it is usually final. This means that the parties involved have to accept the outcome and can't go to court to try to change it.

Why This Clause Exists

The arbitration clause exists to provide a quicker and more private way to resolve disputes. Going to court can take a long time and cost a lot of money. Arbitration is often faster and can be less expensive because it avoids many of the formal steps required in a court case.

Businesses like arbitration because it keeps disputes private. Court cases are public, but arbitration is usually confidential. This means that the details of the disagreement and the outcome are not shared with the public.

Common Risks to Watch For

• The clause may limit your ability to appeal the arbitrator's decision.
• It could require arbitration in a location that is inconvenient for you.
• The rules for arbitration may be unclear or one-sided.
• There may be hidden costs associated with the arbitration process.
• The clause could require you to use a specific arbitrator or arbitration service that you are not comfortable with.

Example in Plain English

Imagine you sign a contract with a company to provide a service. Later, you feel the company did not fulfill their part of the agreement. Instead of going to court, the arbitration clause in your contract requires you to meet with an arbitrator. You both present your sides, and the arbitrator decides that the company needs to fix the issue. You both have to accept this decision and can't take it to court.

When This Clause Causes Issues

• If one party doesn't understand that arbitration is final and can't be appealed in court, they might be surprised by the outcome.
• Problems can arise if the arbitration process is more expensive or takes longer than expected.
• Disputes might occur if the arbitrator seems biased or unfair, especially if one party feels the arbitrator favors the other side.

What to Do Before You Sign

• Ask whether the arbitration decision is final or if there are any options to appeal.
• Find out where the arbitration will take place and if it is convenient for you.
• Check if the rules for arbitration are clear and fair to both parties.
• Inquire about any costs involved in the arbitration process.
• Ask if you have a say in choosing the arbitrator or the arbitration service.