Your Guide To An Arbitration Agreement

Contracts can be daunting, mainly if they contain language you don't understand or processes you aren't familiar with. There are times when one party may ask another to sign an arbitration agreement. What is that and why is it important? There are many aspects of this agreement you should be aware of before signing.

Unfortunately, there are times when a disagreement between two parties escalates and needs to be addressed legally. Some of these disputes need to be sorted out with the help of a third party. Many times these usually develop into full-blown lawsuits and end up going through a lengthy, and expensive, legal process ending in proceedings before a judge in court.

However, there is another route the parties can take to resolve disputes. Arbitration is becoming more prevalent as parties seek ways to cut costs and arrive at legal resolutions quicker. Arbitration agreements are becoming more popular at the onset of a business relationship to avoid the potential for this lengthy and expensive process. What exactly is an arbitration agreement and how might it affect you?

Essential Elements of an Arbitration Agreement

An arbitration agreement is, simply put, an agreement between parties to forego lawsuits and litigation in favor of arbitration should a disagreement arise. The contract is executed at the beginning of a relationship between the parties. The arbitration agreement can be a separate document, or it may just be a single paragraph clause within a lengthy contract. It is often found under the heading of "Dispute Resolution." In fact, you may already have signed many arbitration agreements in your life without realizing it. In these cases, it probably had something to do with a good or service you were purchasing such as computer software or license agreements.

There are some instances where an arbitration agreement has more significant and potentially more negative ramifications, such as employment and medical disputes.

Typical examples of business relationships that utilize arbitration agreements are:

  • Employer-Employee
  • Doctor-Patient
  • Hospital-Patient
  • Software developer-User

In each of these relationships, and in others, there may be a higher risk of liability on behalf of the business. Therefore, to reduce the exorbitant costs typically incurred in litigating disputes, an arbitration clause is inserted into a contract.

What are some of the pros and cons of signing an arbitration agreement? Once signed, can you change your mind and go the court route?

Benefits of an Arbitration Agreement

There are a few reasons why signing a contract that includes an arbitration clause is beneficial.

Quicker Resolution

Lawsuits can take a long time before a resolution is reached. With the court dockets getting longer, timeframes for appearances before judges are getting later making cases drag on. You may be involved in the litigation process for years before you even step foot in a courtroom. Arbitration, on the other hand, is a much quicker process, although it still can take months. The American Bar Association indicates it can take up to a year to close a case that is subject to arbitration.

Cost Saving

Due to the quicker nature of the process, arbitration is a cost-saving process. This savings is due in large part to the reduced time an attorney will have to be involved and work on the case. Because the process in arbitration is on a much smaller scale, attorneys won't be billing as much time in preparation or attendance. This savings benefits both sides.

Confidential Information

You probably don't realize it, but litigation proceedings are usually public record. While there may be aspects of the proceedings and details that are confidential, most are not. The public and the press may attend testimony in open court. If your dispute is sensitive and you would rather not have it overheard by others, then arbitration is a better option. The proceedings take place behind closed doors, and the final decision is kept out of the public records.

Choosing an Arbitrator

In litigation, a judge is randomly assigned. That judge's record may indicate an unfavorable verdict in cases such as yours. In arbitration, there is some latitude when choosing the decision maker. You may opt to go with a retired judge or attorney who has some degree of expertise in the matters being disputed.

Contingent Process

Some employers won't hire you if you refuse to sign an employment contract because of the arbitration agreement. Also, some doctors and hospitals may deny services for the same reason. Therefore, it is beneficial to be familiar with the way the arbitration process works, so you can decide if it's worth losing a job or seeking another medical provider.

Drawbacks To an Arbitration Agreement

As with almost anything, there are some negative implications you should be aware of before signing an arbitration agreement.

No Jury

There are no juries in the arbitration process. Juries can be beneficial in instances where a litigant may garner sympathy. Employment cases and medical malpractice are two examples of the types of cases where the jury may use compassion or empathy in deciding the outcome. In arbitration, that emotional factor is removed. The arbitrator or panel will decide the case on facts alone; hence, the reason why employers and medical providers regularly utilize arbitration agreements in contracts. They don't want to take the chance that the jury will decide by emotion in favor of the victim.

Limited Discovery

One reason arbitration is quicker is the information exchange between the parties is limited. In litigation, both sides have the right to request almost any document or record from the other that may be relevant to the case. This process is called discovery, and it often assists in building the litigation procedure. This process is lengthy and can stall out if one side or the other doesn't comply or has follow-up questions or requests. In arbitration, this process exists, but it is very narrow. This limited scope may hurt your ability to mount a case because you do not have access to all the information you need.

No Choice

Frequently, you will be asked to consent to the arbitration process before any issue arises. At that time you don't have any reason to believe you will ever need it. If an event occurs, and you need to go through a litigation process, you are limited to arbitration. You no longer have the choice to do one or the other because you signed the agreement months or years before.


Be warned: The arbitration agreement may favor the party who created it. Before you sign it, be sure to read it carefully. It should set forth the terms and process of the arbitration. You will want to look for things like who can choose the arbitrator or panel and what type of arbitration it is. If the party who wrote the agreement is the only one who can select the arbitrator or panel, you might not want to sign it. Also, if the arbitration is non-binding, meaning the decision cannot be appealed, you may want to reconsider before signing it.

Final Decision

In court proceedings, either party may appeal if unsatisfied with the outcome or if there is a breakdown in the process. This same progression is not available most of the time in arbitration. The decision cannot be appealed or overturned, unless there is substantial evidence that there was a breakdown in the process or rules were broken. It is very rare for an arbitration decision to be overturned.

Now that you have the basic facts behind what an arbitration agreement is, you are more prepared to decide whether it's something you want to sign. If you do have a grievance and are subject to an arbitration agreement, here are a few things you can expect.

What Is Arbitration?

The arbitration proceeds a lot like a trial except for a few differences. The proceedings are informal and take place out of a courtroom. The parties are entitled to obtain some discovery from each other, but they can't get everything they might be able to if they went the litigation route. The decision of the arbitrator can either be binding or non-binding depending on the arbitration agreement's terms and conditions. Binding means the parties agree that the arbitrator's decision is final and cannot be appealed; likewise, non-binding means the decision can be appealed or rejected outright.

An arbitrator is a third-party who acts as a judge. Usually, an arbitrator is another attorney or retired judge. In some cases, the arbitrator is an expert in the field at the center of the dispute. There are some instances where a panel of arbitrators is used instead of just one. In these instances, it is usually three people in order to have a decisive majority. The arbitration agreement usually sets forth the type of arbitrator to be used (panel or single).

Other than those differences, the arbitration continues just like a court case. The parties can engage attorneys who will request discovery items from each other. An arbitration hearing occurs where both sides present witnesses and evidence to the arbitrator as to why they are right, and the other party is wrong. The arbitrator then takes all the evidence and presentations into account before making a decision. The decision is usually not known that day.

Knowing what you're signing is critical when it comes to any legally-binding document or contract. An arbitration agreement is no exception. While your employer may be contingent on agreeing to this process, pause to think about the ramifications should a dispute arise. While the process is fair, it may not be the best for all given situations. Thus, it's important to know all the facts before signing on the dotted line.