What is an Arbitration Agreement? What is its purpose?

What is an Arbitration Agreement? An arbitration agreement is an agreement between the parties to refer a present or a future dispute arising out of a contract to arbitration.

Details about arbitration and ADR methods are extensively discussed in What are the Main Types of Alternative Dispute Resolution – ADR and What is Binding Arbitration? Is it better than Court?

Types of Arbitration Agreement

There can be 2 types of Arbitration Agreements:

1. Arbitration clause in normal contracts: This means that when in the normal contract or agreement for any business or a bank and customer agreement there is an arbitration clause which means that in case of any dispute in future between the parties to the agreement, they should refer it to arbitration.
2. Submission Agreement: This is the type when there is no agreement between the parties and after the dispute arises the parties decides that the dispute should be settled by arbitration.

Purpose of Arbitration Agreement

The purpose of an arbitration agreement is that the disputes should be settled without going to courts and in a timely manner.

Overall, the parties spend less, takes less time and the procedure is more simple in comparison to court litigations. However, It is not without disadvantages. Let us see the pros and cons of an Arbitration Agreement.

Pros of Arbitration Agreement

• Saves precious time of the parties.
• Usually more cost effective than court litigation.
• Flexible for the parties.
• Less complicated than litigaiton.
• Provides confiecntiality and privacy as the proceedings are not open to public.

 Cons of Arbitration Agreement

• Sometimes it becomes expensive than litigation when the dispute is complicated.
• Closes the door for all the other forms of dispute mechanisms.
• Parties often unknowingly sign and becomes bound by the arbitration clause.
• Generally, it is binding and hence the parties have no option but to accept the decision.

More about Arbitration Agreement here and Arbitration costs here.

What an Arbitration Agreement should contain?

The Arbitration Agreement has to be necessarily in writing whether as a clause in an agreement for arbitration or as a separate agreement for settling a dispute via arbitration. The arbitration clause or agreement can never be oral.

A valid arbitration agreement should be in a form of a valid contract and fulfill all the requirements of a contract. It should specify the disputes which would be referred to as arbitration and the dispute should be related to the agreement to which the arbitration clause is the part.

It also specifies whether arbitration would be binding on the parties and how many arbitrators would be there (the number should be odd). The clause also mentions the governing law and jurisdiction.

A simple Arbitration Clause should at least specify the following:

1. Nature of dispute.
2. Number of Arbitrators.
3. Place of Arbitration.
4. Language of Arbitration.
5. Governing Law.

An Arbitration clause can also specify the method of appointment of arbitrator/s, qualification of the arbitrator/s, time taken for deciding the dispute, etc.

An example of a simple arbitration clause:

“Any dispute, controversy, or claim arising under, out of, or relating to this contract shall be referred to and finally determined by arbitration. The arbitral tribunal shall consist of a sole arbitrator, the place of arbitration shall be “name of the place”, the language to be used in the arbitration proceedings shall be “name of language” and the dispute shall be decided in accordance with the “jurisdiction”.

Process of Arbitration

1. The first step is sending a notice by the Claimant to the Opposite side. A notice for initiating arbitration proceedings is sent to the other party by the claimant generally. The notice should include the details of the dispute, the choice of the arbitrator/s if it is be decided mutually and if certain rules have to be followed then the mention of the said rules. The other party should reply to the notice within a certain time and mention of their choice or arbitrator and confirmation to start the arbitration.
2. After the appointment of arbitral tribunal, the nature of dispute is discussed with the tribunal by the parties and the timeline is set for deciding the dispute.
3. The claimant gives his/her claim in writing and this would be followed by a reply from the Defendant, giving of evidence by the parties, cross examination of the witnesses and experts and finally argument by the lawyers of the parties. The time taken for arbitration hearing depends on complexity of the issue and the claim involved.
4. After this the arbitral tribunal decides the matter and gives it verdict which is called the Arbitral Award. The award can or cannot be challenged depending on the nature of the arbitration. If it is a binding arbitration agreement the parties can only go to court and challenge the award on the ground of fraud or cheating by the tribunal.

A Contract with an Arbitration Clause

Any contract which we sign today has an arbitration clause. Before entering into any contract, one should look for the arbitration clause.

Many times people sign the contract without seeing all the clauses and only after signing do they discover that they are bound by the arbitration clauses. In any contract, one should find that how any dispute will be resolved in case it arises in the future.

The advantages and disadvantages of an Arbitration Clause

The benefits depend on the type of contract.

For example, an Employment Contract generally has an arbitration clause which is beneficial for the employers as the employees give away their rights to go to the court and it is found by surveys that the arbitrator generally decides in favor of the employer.

Advantages of an Arbitration Clause

• Fast – Arbitration reduces the time taken to decide a dispute between the parties as compared to litigation which can take indefinite time. The process of arbitration is also simple which also saves time.
• Appointment of Arbitrator/s – If a dispute requires an expert or a specialist from any field, an arbitrator with special knowledge or with experience can be appointed.
• Flexible – The process of arbitration is more flexible than litigation as the parties have more say in the process of arbitration. The parties have more control on the arbitration proceedings.
• Less Expensive – The process of arbitration can be less expensive as it is less complicated and less time taking. The parties can end up spending more in litigation as it requires expert witness and discovery which is expensive.
• Privacy / Confidentiality – Some disputes may involve sensitive topics which the parties will want it to be not leaked in public. The arbitration process involves the disputes to be heard at a private place or an office and only the parties in dispute are present.

Disadvantages of an Arbitration Clause

• Unawareness – Generally the other party signing the contract is not aware of the arbitration clause and becomes bound by it unintentionally. If the clause is binding, it means giving up the right to go to litigation and also the arbitration award cannot be appealed.
• Too expensive – Sometimes the dispute is complicated and the money involved is less, so the arbitration process becomes expensive.
• Biased – Generally the employment contract or the consumer contract is biased and is favorable for the Company.
• Informal Evidence – The procedure of evidence is informal in arbitration proceedings which may result in injustice.

The Common Pitfalls with arbitration clause

• Not all contracts are meant for arbitration – There are many contracts the disputes of which cannot be decided through arbitration. In case of a complex dispute where expert witness is required for deciding a claim, arbitration is not the method to settle the dispute. Therefore, it is advisable to consult a lawyer before signing the contract.
• Arbitration proves costly for the parties sometimes – Parties agreed to an arbitration clause by signing a general contract which has an arbitration clause. The parties should consult a lawyer before entering into a contract in order to know whether all the clauses are as per the subject matter of contract.
• The clause is vague at times – The arbitration clause should be clearly worded which should not cause any confusion in future. The contract should clearly mention in case of dispute in future, the same shall be referred to arbitration and not stating for arbitration as well as litigation. Therefore, the parties should thoroughly read each and every clause of the contract, because this is the only way by which the ambiguities in future can be avoided.

The jist

The Arbitration Agreement has to be necessarily in writing and with clear stipulations and procedures. The nature and location of arbitration along with the number of arbitrators and governing law must be at least clear.

It is always advisable to consult a lawyer and discuss the clauses in the contract or in order to avoid future confusion or misinterpretations.