Arbitration clause
An arbitration clause requires disputes to be decided by a private arbitrator instead of a court, usually with a final and binding result.
What it means
An arbitration clause moves disputes out of court and into a private process. A neutral arbitrator, or a panel of three, hears the evidence and issues a decision called an award. Awards are usually binding, and courts overturn them only on narrow grounds such as fraud or an arbitrator exceeding its authority.
Clauses often name a provider, such as the American Arbitration Association or JAMS, and its rules. They also set the location, the number of arbitrators, and sometimes who pays. Arbitration can be faster and more private than court, but you pay the arbitrator’s fees, and there is usually less opportunity to demand documents from the other side.
Consider a small software company disputing a $40,000 invoice with a customer. If the contract requires three arbitrators in another city, the costs may approach the amount in dispute. A single arbitrator, video hearings, or a fast-track procedure for smaller claims can make arbitration far more practical.
In the US, arbitration agreements are broadly enforceable under federal law, with some exceptions and added limits in consumer and employment settings. They often come paired with class action and jury trial waivers.
What to watch for
- Check which arbitration provider and rules apply, and look up their filing and hearing fees.
- See how many arbitrators are required. Three arbitrators can cost roughly three times as much as one.
- Note where the arbitration takes place and whether hearings can be held by video.
- Look for carve-outs that still allow court for unpaid invoices, small claims, or urgent injunctions.
- Check whether the proceedings and the award must be kept confidential.
Example clause
Any dispute arising out of or relating to this Agreement shall be resolved by binding arbitration before a single arbitrator under the commercial arbitration rules of the administering organization agreed by the parties. The arbitration shall take place in Wilmington, Delaware, and judgment on the award may be entered in any court having jurisdiction.
You give up going to court; one arbitrator in Delaware decides any dispute, and the decision is very hard to appeal.