Seeing an arbitration clause in a business contract is very common these days; it is a promise between the contracting parties that they will solve their dispute via arbitration in the event of a disagreement or breach of contract.
What is arbitration?
Arbitration is a form of alternative dispute resolution (ADR). It is a process conducted outside the courtroom and an alternative to litigation. While many business disputes or breaches of contract end up in court, arbitration is an effective method for solving conflicts in all areas of business. It is particularly effective in certain circumstances because it takes into consideration not only the dispute but the ongoing relationship between the parties.
How does arbitration work?
Arbitration is, in a way, somewhere in between mediation and litigation. Arbitration is a process where the parties come before an arbitrator or panel of arbitrators, make their case and submit the evidence they have.
The arbitrator then listens to both sides and reviews the evidence and all documentation provided. If there is something in the case that the arbitrator is unfamiliar with, he can request a neutral third-party specialist for support in understanding the topic.
After the arbitrator has reviewed all evidence, heard all arguments and listened to both sides, they render an award to one of the parties. This award is typically binding and not subject to an appeal, which is why many businesses choose arbitration, as it gives the parties the opportunity to end the conflict then and there.
Many businesses choose to include arbitration because it is efficient, cost-effective, and a much less adversarial path for conflict resolution between parties, allowing them to continue their business relationship if they choose to do so.