Arbitration agreements are everywhere.

Most people encounter them in one form or another without even thinking about it.

Many employers require their employees to sign them.

And credit card companies often have an arbitration agreement in place before awarding customers any credit.

But what is an arbitration agreement? And why do so many companies insist on them?

That’s precisely what we’re looking at today.

We’re going to walk you through the ins and outs of arbitration agreements and even throw in a helpful example at the end. So, stick around.

Key takeaways:

  • Arbitration is generally a faster and cheaper way to resolve disputes without needing to go to court.
  • Arbitration agreements can help companies keep litigation costs to a minimum.
  • Many companies require customers and clients to sign arbitration agreements before granting access to their products, services, or employment.
  • These agreements require several sections to be included. An arbitration agreement template helps ensure you don’t miss anything.

What is arbitration?

Arbitration is a type of dispute resolution. It’s similar to a court proceeding but is less costly and generally quicker.

It’s also less formal than a court setting and usually takes place in a conference room.

During the process, the arbitrator listens to the cases put forward and acts as a judge.

The role of the arbitrator could be filled by an industry expert, a lawyer, or even a retired judge.

During the arbitration, both parties can have lawyers and witnesses.

They can also present evidence to support or defend their case.

Although information can be shared in arbitration, there are more limitations than in a court case.

For example, either party might not be obligated to share something with the other.

Once the arbitrator has listened to both sides of the dispute, they make a decision.

In most cases, their decision is final and cannot be challenged.

The specific ruling lies with the arbitrator.

It could be a decision for one party to award the other compensation.

Or something entirely different, like stopping one party from proceeding with a project that infringes the copyrights of the other.

The benefits of arbitrations

When deciding whether to opt for arbitration over a court case, it helps to understand their benefits.

There are multiple benefits to choosing arbitration over a lawsuit. These include:

They’re less expensive

With arbitration, you avoid the costly business of litigation. While arbitration is not free, it’s considerably cheaper than court.

Arbitration costs can include registration fees, admin fees, and accounting fees. It also includes an hourly rate for the arbitrator.

Normally, the losing party pays the arbitration costs, but this can be overruled.

They’re confidential

When you go to court, the case is a matter of public record.

A court trial may be subject to public scrutiny, which can be damaging to a company’s reputation.

On the other hand, arbitration is all done away from the public eye.

They’re quicker

Court cases can take a long time to go through the system and get to trial. Arbitration is much quicker.

The entire process – including issuing an award – can be done in a matter of months or even weeks.

What is an arbitration agreement?

An arbitration agreement is something that companies require customers and clients to sign before giving access to their products, services, or employment.

It is either nestled in a broader contract or drawn up as a separate document.

While you may be able to negotiate your contract, companies typically create them to protect their reputation and assets in case of disputes.

Therefore, negotiation might be complex if the company doesn’t view your requests as being beneficial to them.

Naturally, a lawyer will normally write or at least check over an arbitration agreement meaning that it’s airtight.

A good example is a credit card company having a clause in your contract stating that disputes will be settled in an arbitration rather than a court.

Another common one is arbitration agreements in employment contracts.

Arbitration Agreement Template

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Use this free arbitration agreement template to define the process and terms for resolving disputes between two parties. It is suitable for use in both a personal and corporate context. It includes easy-to-modify sections relating to named arbitrators, hearings, costs, confidentiality, and applicable law.

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The advantages of signing an arbitration agreement

There are some advantages to signing an arbitration agreement. For one, a company can refuse to employ you if you don’t sign their agreement.

Granted, this doesn’t paint them in a very positive light. However, the sad truth is that signing an arbitration agreement is often the condition of employment.

Another advantage, as discussed earlier, is that settling a dispute will be cheaper than taking the case to court if one does arise.

This is true for both parties. However, consumers and employees, in particular, may not have the funds to pursue a court case if a dispute comes up.

Arbitrations give them the option of a fair and affordable dispute resolution process.

Additionally, with arbitration, you may choose who settles the dispute, whether it’s an industry expert or someone with specific skills or knowledge.

Furthermore, while a court can only give rulings that involve monetary compensation, arbitration can be more creative.

For example, an arbitrator can order the company to reinstate you if you were wrongfully dismissed from your employment.

A recent report published by NDP Analytics showed that consumers are likely to win more money in arbitration than in court.

Plus, they are likely to succeed in 44% of arbitration cases compared to 30% of court cases.

This puts them on a far more even playing field when it comes to disputes with companies.

The arbitration decision is final, so even courts won’t overturn the verdict. However, they might make sure the ruling is enforced.

The disadvantages of signing an arbitration agreement

Of course, there are some downsides to signing an arbitration agreement, aside from the fact that people are often not even aware of what they’re agreeing to.

If they do sign such an agreement, they’re effectively waiving their right to change their minds at any point in the future.

Another disadvantage of arbitration is that they don’t have a jury.

This means the decision lies with one person. Juries may also be sympathetic to certain cases, like employment disputes.

This is because they’re often made up of ordinary people who can relate to the employee more than the organization.

Because of the stricter rules on information sharing, going down the arbitration route might make it more difficult for you to build your case.

You should also consider any types of contract clauses hidden in the agreement before signing it, such as not having an equal say in who the arbitrator will be or not being allowed legal representation.

What is a mutual arbitration agreement?

A mutual arbitration agreement is exactly what it sounds like. It’s an arbitration agreement that two or more parties have entered into that benefits them both equally.

In contrast, an arbitration agreement normally favors the party that writes it.

Like an arbitration agreement, a mutual arbitration agreement can be either an electronic or traditional contract.

Signing a mutual arbitration agreement is voluntary, and both sides can have an equal say in what’s included in the arbitration letter.

Example of a mutual agreement to arbitrate claims

Mutual arbitration agreements can be any length, from a few sentences to a few pages. Use an arbitration agreement template that’s pre-loaded with all the right information.

To give you an example of a mutual agreement to arbitrate claims, here is what it must include:

  • The parties involved: The agreement must state who the agreement is between, as well as who created it and who it was prepared for.
  • The arbitrator: Details of the arbitrator; their name, address, and other contact information.
  • Pleadings: These are the demands and issues of both parties in relation to the agreement.
  • Pre-hearing details: This includes when to expect a pre-hearing in the event of a dispute and what kind of information can be shared.
  • Discovery dispute: This section outlines the process of dispute resolution prior to the hearing.
  • Final hearing: Details when and where the arbitration will take place.
  • Awards: Explains the conditions of delivering the award, such as how long it will take.
  • Sanctions: The agreement states that there may be sanctions for any party that doesn’t stick to their agreement.
  • Costs and fees: This section says who will pay the various fees involved in an arbitration.
  • Uphold the agreement: An arbitration agreement should state that no parties can absolve or waive their agreement. This is called ‘No Invalidation’.
  • Confidentiality: Details the confidential aspects of the agreement. For example, parties may not disclose any details of the case to the public.
  • Applicable law: Laws vary between countries and states. Therefore, an arbitration agreement specifies the laws by which the parties will be judged.
  • Sign and date: Finally, both parties must agree to the arbitration agreement by signing and dating it.

Reduce litigation costs and maintain the privacy of disputes with an arbitration agreement

Arbitration agreements are the way forward for many businesses and consumers alike.

With these agreements, you can reduce your litigation costs considerably.

Plus, if any disputes arise, you can be sure to keep your company out of the spotlight and maintain its privacy.

PandaDoc is an invaluable ally when it comes to creating personalized documents for any situation.

In addition to templates for arbitration agreements, we’ve got loads of others for dozens of different situations and use cases.

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