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What is an Arbitration Agreement?

By John Markley
Updated May 17, 2024
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An arbitration agreement is a legal agreement in which the parties involved agree that disputes between them will be submitted to and settled by a third party, called an arbiter, arbitrator, or arbitral tribunal. Depending on the type of agreement, the arbiter's decision can either be legally binding or simply advisory. If binding, the parties to the agreement usually effectively give up their right to sue over the dispute in the regular court system unless the arbitration process is shown to be fraudulent.

An arbitration agreement can can be made by parties to a dispute after it has arisen or can take the form of an agreement requiring that disputes arising between the parties to the agreement be submitted to arbitration in the future. The arbiters may be experts from a firm or other organization that provides professional arbitration services, or simply people with expertise in the issue being disputed who are considered acceptable by the disputants. Arbitration agreements are used in a variety of economic areas.

Arbitration is frequently used in commercial disputes between businesses, and a binding arbitration agreement is often included in commercial contracts. Arbitration is especially popular in international business, as differences in the laws and legal procedures of different countries can make resolving international business disputes in the regular court system difficult, and the verdict of one country's court may not be enforceable in other countries. A contract's arbitration clause can specify the place of arbitration and which jurisdiction's laws will be applied to arbitration procedures. An arbitration clause can also specify a specific arbitration institution, such as the American Arbitration Association, the London Court of International Arbitration, or the Hong Kong International Arbitration Centre.

Binding arbitration agreements are sometimes included in the sale of consumer goods. This practice is controversial, primarily because arbitration agreements for consumer goods are sometimes confusing to the average consume, or cannot actually be seen and consented to until the item has already been bought. Examples of the latter include agreements that are inside an item's physical packaging — in the manual, for example — or in a software licensing agreement that is shown to the consumer after the software has been purchased. The enforceability of these agreements varies by jurisdiction.

Arbitration agreements are also sometimes used in labor-related disputes. Disputes between employees and employers are frequently settled by arbitration, and some employers have mandatory arbitration agreement clauses in employment contracts. Arbitration is also used on a larger scale in relations between employers and labor unions. Contract negotiations and disputes are often submitted to arbitration, and collective bargaining agreements often have arbitration clauses specifying procedures for resolving employee grievances against the employer.

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