Arbitration Agreements: An Alternative to Lengthy Litigations

Arbitration is a process in which a dispute between two or more parties is resolved outside the court system in order to avoid costly and lengthy litigation. To begin the process of arbitration, parties select a neutral person, called an arbitrator, and agree to be bound by the arbitrator’s resolution. An arbitrator is generally an expert with training in an area related to the dispute.
 
If both parties are unable to agree upon an appropriate arbitrator, they can follow a general procedure to be randomly matched with one. In most cases, the results of an arbitration are final and binding. In some special cases, however, federal arbitration legislation will allow for appeal.

Reasons for Choosing Arbitration

People may agree to arbitrate nearly any dispute that might otherwise go to the courts. The benefit of choosing arbitration over litigation is that it is a less costly and time-consuming process. While the most common use for arbitration is the resolution of commercial disputes, other arbitration cases may focus on disputes regarding:
  • credit cards
  • debt
  • divorce
  • securities.
Because arbitration is a choice made by private agreement, arbitration hearings are not open to the public, and awards are not considered public record. This can be a compelling reason to choose arbitration over litigation if the case in question treats sensitive information like bankruptcy, personal affairs or credit history. Individuals dealing with such issues may opt for arbitration as a way to protect their privacy and avoid bringing the issue to public court.

What You Need to Know about Arbitration Agreements

An arbitration agreement is part of the larger contract drawn up when two or more parties decide to use arbitration, instead of the regular litigation process in a court, to resolve a dispute. An arbitration agreement is normally a clause included within the main arbitration contract.

Severability of Arbitration Agreements

Due to the fact that an arbitration agreement is contained within the larger document, it is subject to all laws and conditions that govern the main contract.
 
It's important to note, however, that arbitration agreements can also function and exist independently of the main agreement. The independent nature of the arbitration agreement is referred to as severability. For instance, even if a main agreement is found to be invalid, the arbitration clause itself may still be legally binding.

Types of Arbitration Agreements

Arbitration agreements are typically divided into two different types:
  1. Pre-dispute agreements: These refer to contracts that provide that, if any dispute should arise between two parties, it will be resolved by arbitration.

  2. Post-dispute agreements: These are contracts signed after a dispute has already arisen, stating that both parties agree to resolve the dispute by means of arbitration. Post-dispute agreements are also often referred to as a "submission agreements."

In general, pre-dispute agreements are far more common that post-dispute arbitration agreements.

For example, many credit card companies will include in the fine print of their terms and conditions a pre-dispute agreement that stipulates that any claims you bring forward will be resolved by arbitration. Including such a clause often protects company interests by side-stepping costly litigation processes.

Because many major corporations with which you sign contracts commonly use arbitration agreements, take some time to understand the facts and familiarize yourself with how arbitration agreements function before deciding to sign an arbitration contract.
 
Resources
 
U.S. Securities and Exchange Commission (2008). Arbitration. Retrieved March 6, 2008, from the U.S. Securities and Exchange Commission Web site.

FreeAdvice (n.d.). What is Arbitration? Retrieved March 6, 2008, from the FreeAdvice Web site.