What is an Arbitration Agreement

An arbitration agreement is a written contract which requires all agreeing parties to settle disputes without going to court. The Federal Arbitration Act (1925) governs private dispute resolution through arbitration.

In general, the Act requires parties agreeing to a contract with an arbitration clause to submit any contract dispute to arbitration before undertaking court action. The Act also allows compulsory and binding arbitration clauses which require its participating parties to give up the right to appeal an arbitrator’s decision in court. The only exception is if the arbitration clause itself has been challenged.

Arbitration agreements are not usually set out as independent contracts. Instead, they are covered by arbitration clauses which are part of a broader contract. Any civil contract which could potentially result in one party suing the other may include an arbitration clause.

Contract parties may enter into an arbitration agreement after a dispute has been raised. This is common in divorce proceedings. Alternately, contract parties may enter into an arbitration agreement before any dispute exists. This is often seen in labor law, as well as in other business contracts.

Arbitration is conducted by a single unbiased arbitrator or by an unbiased arbitration panel, who decide on the appropriate arbitration award. Demonstration of arbitrator bias is a valid basis for appeal of the judgement. To preempt this possibility, some arbitration agreements designate a neutral organization or person as arbitrator.

All arbitration awards must be confirmed in a court of law within 1 year. This judicial confirmation gives the arbitration award the force of an enforceable judgement.

Arbitration decisions are not necessarily final. Limited appeals are possible, but permissible reasons for appeal vary between jurisdictions. Any objections to an arbitration award must be registered within 3 months.

Limits on arbitration

In a recent (2012) decision, the National Labor Relations Board (NLRB) has ruled that compulsory arbitration agreements which do not allow “concerted activity” are against federal law. Under this ruling, an arbitration agreement cannot force employees to waive their right to pursue a class or collective action. At the time of writing, this finding applies to compulsory arbitration agreements which explicitly require disputes to be resolved individually.

Some arbitration agreements may bind one party to arbitration but not the other. Mutuality of obligation is not a universal requirement. At present, the United States Court of Appeals has ruled that mutality of obligation in arbitration contracts is not required where the contract limits the arbitration award.

However, geographic and choice-of-law clauses within an arbitration agreement remain valid. This means that the arbitration agreement can force all involved parties to resolve disputes in a jurisdiction with laws which may favor some types of decisions over others. The jurisdiction may be a different county, state, nation, or even a place which the plaintiff has never visited.

In some jurisdictions, some types of contracts may not be legally disputed without involving the court system. For example, German law excludes unnotarized consumer contracts from arbitration agreements, because without a notary, the consumer may not be fully informed about the implications of the contract. These kinds of exclusions are much more common outside the United States.

In general, binding arbitration clauses are encouraged in the United States because outside arbitration requires much less court time than even simple disputes. As a result, most of the financial burden of resolving disputes is shifted from the tax-funded judiciary system to privately-funded arbitration. In a successful arbitration which is not challenged, the judiciary system is only required to confirm an arbitration award.