A Guide to Arbitration Provision & Arbitration Clause

What is meant by an arbitration provision?

An arbitration provision, also known as an arbitration clause is a clause that is signed by two parties having a dispute and are willing to sort out their issue with the help of arbitration instead of going to the courtroom.

For example, let’s say that two parties i.e. A and B have a dispute over a piece of land. Both parties wish to solve their dispute legally but they know that going to the courtroom is a very time consuming process. So they decide to choose the option of arbitration. The clause that will bind both parties for the solution of their dispute through arbitration is known as the arbitration clause.

What is a Binding Arbitration Provision?

A binding arbitration provision is resting your case in front of the arbitrator and trusting the arbitrator completely with his decision. The decision of an arbitrator is respected no matter what the decision is. In this case, any of the two disputing parties can not challenge the decision taken by the arbitrator and are bound to follow the order.

Cell phone companies, credit card issuers, and banks use binding arbitration provisions where clauses and agreements are set among the customer and the company regarding the loan payment and other things.

What is a non-binding arbitration provision?

Binding and Non-binding arbitration provisions also set clauses for the settling of a dispute through arbitration. But a non-binding arbitration gives both parties a margin. In case if any party is not satisfied with the decision made by the arbitrator, they may step out of the case.

In a non-binding provision, the parties are not bound to accept the decision made by the arbitrator. Non-binding arbitration is used in cases like child custody.

In such cases, both the parties are given equal opportunities for creating a safe and positive environment for the child.

The non-binding arbitration clause offers both parents flexibility in the decision and allows them to work for the betterment of their child.

Advantages of arbitration:

Arbitration is preferred due to the following reasons:

Saves time: Courtrooms having long queues outside them, arbitration gives the two disputed parties the benefit of time-saving.

Offers flexibility: Arbitration allows the parties to have flexibility in the timings of the sessions as compared to the courtroom.

Privacy: Arbitration allows the settling of the dispute in private, instead of standing in the court in front of the public which saves the dignity of both parties.

Disadvantages of Arbitration:

Following are the disadvantages of the arbitration process due to which many people refrain from the process of arbitration:

No appeal: If any of the parties is not happy with the decision taken, they can not appeal in court. The decision made by the arbitrator is final and both parties are bound to adhere to it whether it pleases them or not.

No right of discovery: In a courtroom, both parties present their evidence in front of the court and are allowed to cross-examine the evidence. But in the arbitration, cross-examining may or may not be allowed. It depends upon the clause.

When should the parties arbitrate instead of litigating?

If the dispute between the two parties is vital and they might need the option of appealing, they must go for trials in the courtroom but if the matter isn’t big and can be resolved by someone having an expert hand over legalism and law, then they should avoid the time-taking long trials of the courtroom and should opt for arbitration which will give better solution in lesser time.

Drafting Arbitration Clause

If two parties decide to hand over their dispute to the arbitration for settlement, they must also select the arbitration institution they want to rest their case to, as each institution has its arbitration clauses and laws.

If the parties are approaching an arbitration institution for arbitration, then the parties are directed to follow the rules and regulations of the institution. This needs both the parties to carefully choose the arbitrator they want their case to be handled by.

The rules set by the institution vary in ways i.e., when will the final documents be presented in front of both parties, how many people will the arbitrator panel have consisted of, etc.