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What is an arbitration clause, and how does it work?

Clarifying Questions

Q: What is an arbitration clause, and how does it work?

-Engaged Entrepreneur

A: Dear Engaged:

Arbitration is a form of alternative dispute resolution in which two parties settle their dispute without litigation. An “arbitration clause” in an agreement requires the parties entering into the agreement to go through arbitration before taking a dispute to court.

In arbitration, your dispute is brought before a neutral third party, or arbitrator, who helps resolve the conflict. Arbitration proceedings are far less formal than litigation and can be scheduled with much more flexibility. Also unlike litigation, arbitration is private, so everything is kept confidential.

Arbitration can be binding or nonbinding. If it’s binding, the parties waive their right to take the dispute to trial and agree to follow the arbitrators’ decision, which can be enforced by the court. An arbitrators’ decision typically cannot be appealed. In nonbinding arbitration, either party is free to take the matter to court if they disagree with the decision. 

It’s common practice for businesses to include arbitration clauses to their agreements. In fact, if you use Facebook, Amazon, or Netflix, you’ve agreed to participate in arbitration, whether you know it or not.

Because arbitration can be faster, cheaper, and more convenient than litigation, adding an arbitration clause to your agreements can help you cut down on the time, money, and inconvenience of litigation if you ever need it.

Contact a Family Business Lawyer® for support in adding effective arbitration clauses to your agreements.

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