Arbitration agreement: How-to guide

In the business world, disputes are inevitable. Small disagreements may be resolved between the parties, but larger ones may linger and grow, leading to hard feelings, delayed deals, and lost business. The court system was designed to determine these issues, allowing the parties to argue their cases before a judge or jury. Unfortunately, courthouse resolution has become an increasingly costly and inefficient venture, and even simple cases can cost hundreds of thousands of dollars and take years to conclude. One way to avoid this process is to submit the dispute to arbitration.

When parties want to arbitrate their issues, an arbitration agreement (sometimes called a “submission agreement”) can be drafted and submitted to the selected arbitrator. Arbitration will take the place of a trial, and the parties give up their right to go to court in exchange for a quick and cost-effective resolution. By resorting to arbitration, you can eliminate unnecessary expenses such as attorney fees.

This article will give you a fair idea about the arbitration process, how to create an agreement, and things to take care of while creating multiple arbitration contracts. A written agreement minimizes confusion, misunderstanding, and error and clearly outlines the parties’ expectations and obligations. Once signed, each party can again focus on resolving the matter and returning to business as usual.

Things you should know in an arbitration process

Arbitration is a way for two parties to resolve disputes outside of court. Together with mediation, it’s often referred to as a kind of alternative dispute resolution or ADR. The individuals entering into arbitration put their dispute before one or more people called arbitrators, who resolve it and enter a decision. In most cases, arbitration decisions are final. In other words, it is the equivalent of a judge’s ruling and is not a mere suggestion.

In most cases, arbitration is a voluntary process. In other words, both parties must agree to arbitrate their dispute — one party cannot enter into forced arbitration.

An agreement to arbitrate a dispute that has already arisen is sometimes called a “submission agreement.” A submission agreement is needed when the parties don’t have a written contract or a clause in an existing contract that provides that arbitration will be used to settle disputes between them. The submission agreement is used to start the arbitration with the selected arbitrator.

Laws governing arbitration

Most states have statutes governing arbitration, and there is a federal arbitration act that may also apply to your case. These laws vary from jurisdiction to jurisdiction and may require that an agreement contain specific language to be enforceable. For example, the Vermont Arbitration Act requires that the parties sign an additional agreement with a specific acknowledgment of their consent to arbitration.

Disputes where arbitrations don’t apply

There are some types of disputes that should not (and may not, in some states) be submitted to arbitration. For example, many states prohibit the submission of healthcare-related disputes to arbitration. Review your state’s laws for additional information about the types of disputes that may be subject to ADR in your area.

Essential information to be included in an agreement 

A particular arbitration agreement must, at a minimum:

• Be in writing
• Be signed by both parties
• Explain the dispute
• List the names and addresses of the parties
• Specify the amount of money involved
• Describe the proposed solution

After completing and signing the arbitration agreement, the parties must submit the document to the arbitrator or arbitration firm that they’ve selected.

Desk arbitration: What it is

When an arbitrator makes an award or decision based only on the documents provided by the parties as their arguments and evidence, such arbitration is termed "desk arbitration" by the American Arbitration Association (AAA). In a desk arbitration, no hearing is held.

Review and clarification

Before you sign arbitration agreements, the involved parties should be given ample time to review the document and or seek counsel if desired. This will reduce the likelihood, or at least the efficacy, of a claim that one party did not understand the agreement’s terms or the effect of arbitration in general.

Both parties should review the completed agreement carefully to ensure that all relevant deal points have been included. It is better to be over-inclusive than under-inclusive. Do not assume that certain expectations or terms are agreed to if they are not stated expressly in the document.

Signing arbitration agreements

Each party should be given at least one original, signed copy of the arbitration agreement.

Depending on the nature of its terms, you may decide to have your arbitration agreement witnessed or notarized. This will limit later challenges to the validity of a party’s signature.

If the original agreement or the conditions of your arbitration are complicated, you can always seek legal advice from professionals. Paying a specific amount to an attorney can help you draft a document that will meet your specific needs.

Key terms of an arbitration agreement

The following arbitration provision will help you understand the terms of your agreement.

Introduction of parties

The first section identifies the parties involved in the arbitration agreement. When a dispute arises, the parties who require arbitration will act as claimants. And the ones against whom the claimants raise the claims are called respondents.

The intro segment also includes details like:

• Cause of the dispute wherein you can give a brief outline of the nature of the dispute
• Issues you want to cover through arbitration and disputes that you do not want to include
• Details of the organization hired for the arbitration process and the rules followed in the dispute resolution procedure by this organization

In an arbitration agreement, the parties also have the ability to select the rules they want to govern their arbitration. There are a number of organizations that publish arbitration rules that their arbitrators will follow. Here are some organizations that provide alternative dispute resolution services:

• American Arbitration Association
• CPR Institute for Dispute Resolution
• JAMS Comprehensive Arbitration Rules and Procedures

If you are using industry-specific rules, for instance, for commercial disputes, follow commercial rules, and in the employment context, you can follow the rules of employee arbitration agreements of these organizations.

Note that this decision is not irreversible. If these rules prove unwieldy down the road, you and the other party can change them by mutual agreement to suit your arrangement.

Submittal to arbitration

This is the part where the involved parties mutually agree to resolve their dispute using arbitration, and an arbitrator's decision is agreed as final.

Initiation of arbitration

This section explains how to start the arbitration itself. The process will vary depending on the rules you selected to govern your arbitration, but this paragraph provides some general guidelines. You have to provide the mailing (or online) address of the arbitration organization you selected to administrate your proceeding.

Arbitrator

Herein, you must decide on the number of arbitrators required to resolve your dispute. You can go for a single or private arbitrator or two or more than that, depending upon the severity of the dispute. You can even hire an arbitration service-providing company for your cases to take collective action out of the court. Often, retired judges take the job of arbitrators since they are believed to have the knowledge and capability to resolve arbitration cases. 

Hearing

This section outlines the date, time, and location of the hearing for an arbitration case. Providing the name of the city, state, and country also helps in avoiding any confusion in the future.

Applicable laws and rules

Applicable law means the law that will govern the arbitration agreement. This can be chosen by the people involved in the agreement.

Arbitration rules state that the arbitration will be governed by the rules governed in the agreement.

Familiarity with rules indicates that whichever rules the parties chose (e.g., AAA, CPR, etc.), they have read and become familiar with them. This is a good idea since it will help you understand what happens throughout your arbitration process.

Preliminary relief

In some cases, the parties' rights will be harmed if they have to wait until a final decision is made. During such instances, the party who gets affected can ask for a preliminary relief. For example, if the dispute is about an action that will take place in the next few days, one party may want to get a preliminary order that prevents that event from happening.

In this section, the parties are given the right to seek this relief either from the appointed arbitrator or from a local court. This is an optional provision, and according to the convenience of the involved parties, it can be included in an arbitration agreement.

Discovery

Discovery is the process through which each party has the opportunity to investigate the other party’s information (e.g., asking to see files, interviewing their witnesses, etc.). In litigation, this is a lengthy and complicated process, and it can drag on for years, costing the parties many thousands of dollars.

There are two options provided to conduct the discovery process. In the first, general authority is given to the arbitrator(s) to conduct the discovery as efficiently and equitably as it/they see fit. The second puts more exact, stringent limits on the conduct of discovery, providing a static time period within which discovery must be completed.

Conduct of hearing

A description of how the arbitration proceedings will work. Below are some of the mandatory arbitration clauses that are included in this section:

(a) Management of proceedings: Gives the arbitrator(s) the ability (and authority) to run the proceedings to make them efficient and as economical as possible.

(b) Powers: To help the arbitrator(s) decide the case, they are given the powers specifically listed in this subsection (including powers to limit testimony or other procedures in the interest of efficiency and cost-effectiveness).

(c) Oath required: Provides that any testimony given in the arbitration will be given under oath.

(d) Right to counsel: As in a court setting, each party to the arbitration is given the right to hire legal representation (but neither is required to do so).

(e) Subpoenas: Allows the parties to require that witnesses attend the proceedings or that documents be provided under subpoena. This subsection makes clear that this power — standard in courthouse proceedings — has been incorporated into the arbitration process.

(f) Unavailable witnesses: Permits the use of the testimony of witnesses not testifying in person to the extent that it would be permitted in a courthouse in the governing jurisdiction.

(g) Deadline: Indicates that if something is supposed to be completed by day X (e.g., papers submitted or tasks performed), the party has until 5:00 p.m. on day X to complete it.

(h) Copies: States that whenever one party gives a document to the other, they must also give a copy to the arbitrator(s).

(i) No record/record of proceedings: This is where the parties need to confirm whether they want the arbitration process to be recorded or not. If a recording is made, they will need to provide a copy to the arbitrator(s).

Award

(a) Form of award: This explains the number of remedies indicated by the arbitrator, which range from payment of damages to entering their reasoning about the decision. In commercial cases, arbitrators usually will not write an opinion explaining the reasons for the award unless all of the parties request one.

(b) Timing: Herein, mention the specific time that should be taken by the arbitrators to reach a resolution. The time taken may vary depending on the complexity of your case and the extent of your dispute, and you should make sure you leave enough time to detail your case and have it decided.

(c) Written statement: Provides that the arbitrator(s) will provide a “tentative” decision to the parties before it becomes final. The parties will have the opportunity to respond, and the arbitrator(s) will enter the final decision in the following few days.

(d) Damages: Punitive damages are damages paid not to repay one party for a loss it experienced but to deter the other party from taking the same actions again. In other words, it is a “punishment” of the defendant and not the plaintiff's compensation.

(e) Costs/fees: Although arbitration is considerably cheaper than litigation and other dispute resolution alternatives, there are still some costs involved in the process. This section allows you to divide those costs and fees between the parties as you see fit. You can either split the costs and fees equally (or as decided by the arbitrator(s)), or the losing Party (as determined by the arbitrator(s)) will be responsible for both parties’ fees and costs.

Confidentiality

This section allows the parties to restrict how information regarding their dispute will be used outside of the hearing. Note that arbitrators are already subject to confidentiality laws under the general rules of arbitration, but this section reiterates that responsibility.

Consideration

“Consideration” is what each party gives in the contract. In many cases, this is money one party gives in exchange for goods or services the other provides. 

Effect of agreement on third parties

A statement that nobody other than the parties is intended to benefit from the arbitration agreement. This may seem obvious, but there are some contexts in which the arbitrator’s decision has been extended to companies that did not sign the agreement (e.g., if one group company signs, it may bind other members of its group). If a company “benefits” from an agreement, it may also be thought to be covered under it. This section ensures that non-parties will not be bound by the agreement by receiving specific benefits from it.

Exclusion of liability

Prevents the arbitrator from being held liable for its actions in the arbitration.

Successors and assigns

States that the parties’ rights and obligations will be passed on to heirs or, in the case of companies, successor organizations or organizations to which rights and obligations have been permissibly assigned.

No implied waiver

It means that if either party allows the other to ignore or break an obligation under the agreement, it does not mean that the party waives any future rights.

Notice

Mention the addresses to which all official or legal correspondence should be delivered for both the claimant and the respondent.

Counterparts; electronic signatures

The title of this provision sounds complicated, but it is simple to explain. It says that even if the parties sign the agreement in different locations, or use electronic devices to transmit signatures (e.g., fax machines or computers), all of the separate pieces will be considered part of the same agreement. In a modern world where signing parties are often not in the same city - much less the same room - this provision ensures that business can be transacted efficiently without sacrificing the validity of the agreement as a whole.

Severability

Protects the terms of the agreement as a whole, even if one part is later invalidated. For example, if a state law is passed prohibiting choice-of-law clauses, it will not undo the entire agreement. Instead, only the section dealing with the choice of law would be invalidated, leaving the remainder of the contract enforceable.

Headings

This section explains that the headings at the beginning of each section are meant to organize the document and should not be considered as operational parts of the agreement.

Entire agreement

In this section, the parties agree to the terms and conditions mentioned in the agreement.

Creating arbitration agreements and ensuring that all the arbitration clauses are in your agreement can be a tricky and complicated process. In case you are in the middle of such a soup, using an arbitration agreement template as your initial reference point is preferable. With LegalZoom's template readily available for you makes the agreement drafting process much easier.

Our template can also be readily used once you fill out the required information in the template. Once it is completed, the template can be downloaded for free, too.

If you want to edit or make changes to the existing template, you can easily subscribe to our form templates plan and customize it as you wish with the help of the rich editor.

Frequently asked questions

What's an arbitration agreement?

If a business dispute occurs, the time and money it takes to go to court can make a challenging situation even more unpleasant. One way to settle a dispute without the hassle of court proceedings is through arbitration. In an arbitration agreement, sometimes called a submission agreement, both parties agree to abide by a decision made by an appointed arbitrator. This often resolves the dispute in a more timely and cost-effective manner.

What key details should you have while creating arbitration agreements?

While creating an arbitration agreement, the following information should be kept handy:

• Name and contact information of the business or the individuals involved in the agreement
• Conditions required for the arbitration, i.e., how two parties will their arbitrator, which governing body's rules will be followed, number of arbitrators involved, and other terms and conditions
• Location or place where the arbitration proceedings will be held
• The time period when the proceedings will start and how long arbitrators should take to reach a decision