What is an arbitration agreement?

Arbitration agreements are everywhere these days, and chances are you’ve signed a few without even realizing it. You may have agreed to arbitrate disputes when you clicked “agree” to a software license or when you purchased ordinary goods or services.

But what happens when an arbitration agreement is part of an important contract such as an employment agreement? Should you sign it?

By agreeing to arbitrate, you give up certain rights while also gaining some benefits. Understanding the pros and cons ahead of time will help you make a smart decision when you’re asked to sign.

What is arbitration?

Arbitration is a way of resolving a dispute without filing a lawsuit and going to court. The arbitration process is similar to the proceedings in a court case: the parties may have lawyers, they exchange information, and there is a hearing where they question witnesses and present their cases. After the hearing, the arbitrator will make a decision.

Arbitration is more informal than litigation and the procedures are simplified.

In arbitration, the parties usually have a more limited right to obtain documents and other information from one another.

Most arbitrations occur in a conference room rather than a courtroom, and the arbitrator may be a lawyer, a retired judge or a person with experience in a particular industry. Most arbitrations are binding, meaning that the parties must accept the arbitrator’s decision and cannot try to resolve the same dispute in court.

What’s in an arbitration agreement?

Before arbitration can go forward, the parties must have agreed to arbitrate the dispute.

Arbitration agreements are usually signed at the beginning of a business relationship – long before there’s a disagreement.

They are often just a few sentences long, and are commonly found near the end of a larger contract under a heading such as “Arbitration” or “Dispute Resolution.” Employee arbitration agreements may be buried in an employment contract or employee handbook.

An arbitration clause will typically say that all disputes arising under the larger contract will be submitted to binding arbitration. Sometimes a contract will say that only certain disputes will be arbitrated.

The agreement may also say how the arbitration will be conducted. It may specify certain arbitration rules, such as the American Arbitration Association (AAA) rules, and it may say whether there will be one arbitrator or a panel of arbitrators. The agreement may also specify how the arbitrator will be chosen.

The parties to a dispute may also agree to arbitration after a conflict has arisen, or even after a lawsuit has been filed.

Advantages of signing an arbitration agreement

• Arbitration is usually faster and less expensive than litigating a case in court.
• Arbitrations are confidential, which means that you will not have to publicly testify. The specifics of your dispute will not be in the public court records.
• In arbitration, you can choose who will decide your dispute. This can be particularly helpful if you want a decision-maker who has specialized technical knowledge or experience in your industry.
• Some employers will not hire you if you refuse to sign an employment arbitration agreement.

Disadvantages of signing an arbitration agreement

• Arbitration awards cannot be appealed. You must accept the arbitrator’s decision as final.
• You cannot have a jury trial. This can lead to a worse result if you have an employment dispute because juries are often sympathetic to employees.
• The parties’ exchange of information is more limited in arbitration. This can make it harder to develop your case in an employment arbitration or in any other situation where the other party has most of the information and documents.
• If you are asked to agree to arbitration before you even have a dispute, you may not know whether you want to arbitrate or not. If you sign the agreement and decide later that you would rather pursue a claim in court, you won’t be able to—or you will rack up legal fees trying to invalidate the arbitration agreement.
• Like all contracts, arbitration agreements can be one-sided in favor of the party who wrote the agreement. You should be on the lookout for this and make sure the agreement gives you an equal voice in choosing the arbitrator, does not limit the remedies available to you, and does not deny you the right to an attorney.

Arbitration agreements are a way to limit litigation costs and keep disputes confidential. But signing an arbitration agreement also means giving up important rights. Before signing, it pays to read arbitration clauses and reject or renegotiate anything that you’re uncomfortable with.