What is an Arbitration Clause?

An arbitration clause (arbitration provision) is a contractual dispute resolution clause that establishes arbitration as a mechanism for resolving contract-related disputes. The clause also typically indicates, among other things, the rules of arbitration, the procedural law to be followed, as well as the parties’ options, if any, for appeal.

Arbitration can be a less expensive and less time-consuming alternative to litigation, so businesses will often include arbitration clauses in their contracts to help streamline the dispute resolution process.

As the examples below illustrate, arbitration clauses are found in a wide variety of contracts, including service agreements, supply agreements, leases, license agreements, purchase agreements, employment contracts and sales agreements.

Note: this article does not constitute professional legal advice. Zuva Inc. is not a law firm.

What is arbitration?

Arbitration is a common form of alternative dispute resolution (ADR). When a dispute arises, both parties give their consent for that dispute to be submitted to an arbitral tribunal (a panel of unbiased adjudicators) to make a decision. The arbitrator’s decision can be binding (must be accepted and will be enforced by courts) or non-binding (either party can reject the arbitrator’s decision).

Arbitration provides contracting parties with a framework to resolve disputes without filing a court case.

How do you review the arbitration clause in contracts?

Finding arbitration clauses in a contract when they are in their own clearly marked section is pretty straightforward. The dispute resolution section of an agreement can also be a good place to look for them (see example 8 below).

However, arbitration clauses aren’t always clearly labeled, and (as examples 1, 3, 6 and 13 below illustrate) can be buried in seemingly unrelated parts of the contract, requiring careful review to spot.

After locating all the arbitration language in each agreement, some important things to focus on when reviewing these provisions include:

The types of disputes subject to arbitration

Arbitration clauses often cast a wide net to cover a broad range of potential disputes. These may include disputes concerning the interpretation of the contract, the validity of the contract, or a party’s breach of the contract as well as non-contractual disputes, such as those relating to negligence or misrepresentation. On the other hand, some clauses, like example 3 below, will address only one particular kind of dispute.

If an arbitration clause is broader in scope, be sure to note any disputes that are specifically carved out from the application of the clause. For instance examples 1, 8 and 10 below contain exceptions for injunctive relief; example 4 below contains an exception for disputes; and example 11 below contains an exception for the assertion of third-party claims.

Whether arbitration is mandatory

Review your contract’s arbitration clauses carefully to determine whether arbitration is mandatory for any disputes that arise. Many arbitration clauses use words such as “will” or “shall” to indicate that arbitration is a mandatory step in the dispute resolution process; however, some clauses (like example 3 below) will use more permissive language, giving the parties more flexibility to decide whether arbitration is right for a given dispute.

Arbitration rules, venue, etc.

The clause will typically state what procedural law governs the arbitration process - e.g., the Commercial Rules of the American Arbitration Association (see example 1 below) or the International Chamber of Commerce Arbitration Rules (see example 7 below).

It may also indicate the arbitration venue and, in some cases, the language in which the arbitration proceedings will be conducted (see, for instance, example 5 below, indicating that the proceedings will be held in English even though the venue is Paris, France).

Finally, note whether (a) the clause contemplates having an institution (e.g. the American Arbitration Association, the International Chamber of Commerce’s International Court of Arbitration, or, per example 2 below, the National Grain and Feed Association) administer the arbitration proceedings or (b) administration falls to the parties and the arbitrators.

Selection of arbitrators

The clause will also generally state how many arbitrators are to preside over the arbitration proceedings as well as the manner in which these arbitrators are to be appointed. In some cases, the rules of appointment may follow the procedural rules selected (see, for instance, examples 1 and 5 below).

Otherwise, the clause should set out the rules for appointing arbitrators, including, where appropriate, how any breakdown in this process should be resolved. Be sure to note whether arbitrators must have specific qualifications. Example 14 below, for instance, states that “the arbitrator shall be a lawyer with more than ten years experience or a retired or former judge.”

Form of award

In some cases, the clause may specify the manner in which the award of the arbitrator(s) shall be issued. For example, it may indicate that the award is to be delivered in writing (see example 12 below).

It may also state that the award shall include detailed reasons similar to those provided by a judge presiding over a trial (as is the case with examples 4 and 10 below); or alternatively, it may state that the award need not include such details (as is the case with example 14 below).

Note, as well, whether the clause addresses the authority of the arbitrator(s) to grant certain types of relief and/or award certain kinds of damages. Example 12 below, for instance, states that the arbitrators have the authority to grant equitable relief; whereas, example 15 below states that the arbitrators are not authorized to award punitive or exemplary damages.

Payment of costs

The clause will also typically address responsibility for attorney’s fees and other costs of the parties as well as the direct costs of the arbitration. It may provide, for example, that the parties will cover their own legal costs, etc. and split the cost of the arbitration (see examples 4 and 12 below).

Alternatively, as example 14 below illustrates, the losing party could be responsible for covering the cost of the arbitration with each party remaining responsible for their own respective legal costs, etc.; or, in some cases, the clause may even stipulate that the losing party is responsible for all costs, including the legal costs, etc. of the prevailing party.

Opportunity for appeal

The clause should indicate whether the decision of the arbitrator(s) is final and binding; and if there is an opportunity for the parties to appeal, it should specify that as well. Where the parties have chosen institutional rules to govern the arbitration proceedings (e.g., the International Chamber of Commerce Arbitration Rules), it’s important to consult those rules as well to confirm whether they address rights of appeal. If the clause does allow parties to appeal, be sure to confirm what can be appealed and where.

The impact of other provisions

As with the review of any contractual provision, it’s also important to be aware of other provisions that may affect the interpretation of arbitration clauses. For example,

• If the clause requires one of the parties to provide notice to initiate the arbitration process (as is the case in example 4 below), the notice clause details how and to whom notice needs to be given.
• If a party wants to know whether there have been any developments or changes in arbitration law that may affect the enforceability of the arbitration clause, the governing law clause establishes which jurisdiction’s laws apply to a contract.
• Knowing which jurisdiction’s laws apply to the contract may also be useful in the context of disputes involving the contract - especially those pertaining to its interpretation.
• Finally, the venue clause establishes which courts have jurisdiction over litigation relating to the contract, which may be relevant if parties can, for instance, appeal the decision of the arbitrator(s) to a court.

Examples of the arbitration clause

Below are some examples of arbitration clauses from different kinds of agreements. While these examples do not necessarily cover the full range of arbitration clauses one may encounter, they are meant to illustrate the degree to which these provisions can vary from contract to contract. Where an example includes broader contextual language, the arbitration clause is highlighted in bold.

Example 1: From a Services Agreement

9.6 Governing Law. This Agreement will be governed and construed, to the extent applicable, in accordance with United States law, and otherwise, in accordance with California law, without regard to conflict of law principles. Except for requests for injunctive relief, any dispute or claim arising out of or in connection with this Agreement shall be finally settled by binding arbitration in Los Angeles County, California under the Commercial Rules of the American Arbitration Association by one arbitrator appointed in accordance with said rules. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.

Example 2: From a Feed Manufacturing Agreement

F. The Parties agree that the sole remedy for resolution of any and all disagreements or disputes arising under or related to this contract shall be through arbitration proceedings before the National Grain and Feed Association (NGFA) pursuant to the NGFA Arbitration Rules. The decision and award determined through such arbitration shall be final and binding upon the Parties. Judgment upon the arbitration award may be entered and enforced in any court having jurisdiction thereof. (Copies of the NGFA Arbitration Rules are available from the NGFA, 1202 New York Aye, NW, Suite 830, Washington, DC 20005, or on the Website http://www.ngfa.org/).

Example 3: From a Gas Processing Contract

21.10 Replacement Indices.

Should any index used by the parties be unavailable or cease to be published, the parties shall promptly meet and in good faith determine an alternative index or payment methodology that will place each in a comparable economic position to that they would have been in had the original index been available and used. Should the parties be unable to reach an agreement, either may submit the matter for arbitration pursuant to the expedited rules of the American Arbitration Association.

Example 4: From a Plant Connection Agreement

ARBITRATION

24.1 Any dispute arising out of or relating to this Agreement, or the breach thereof, which is not resolved by the Parties acting through their Authorized Representatives shall be settled by arbitration to the extent permitted by the laws applicable to the Parties; provided, however, that no Party to the dispute shall be bound to any greater extent than any other Party to the dispute. Arbitration shall not apply to any dispute or matter that is within the jurisdiction of any regulatory agency.

24.2 Any demand for arbitration shall be made by written notice to the other Party setting forth in adequate detail the nature of the dispute, the issues to be arbitrated, the amount or amounts, if any involved in the dispute, and the remedy sought. Within twenty (20) days from the receipt of such notice, the other Party may submit its own written statement of the dispute and may set forth in adequate detail any additional related matters or issues to be arbitrated.

24.3 Within thirty (30) days after delivery of the written notice demanding arbitration, the Parties acting through their Authorized Representatives shall meet for the purpose of selecting an arbitrator. The Parties may agree upon a single arbitrator, but in the event that they cannot agree, three arbitrators shall be used. Each Party shall designate one arbitrator, and the two arbitrators shall then select a third arbitrator. All arbitrators shall be persons skilled and experienced in the field in which the dispute has arisen and no person shall be eligible for appointment as an arbitrator who is or has been an officer or employee of either of the Parties or otherwise interested in the matter to be arbitrated. Should either party refuse or neglect to appoint an arbitrator or to furnish the arbitrators with any papers or information demanded, the arbitrators are empowered, by both Parties, to proceed without the participation or assistance of that Party.

24.4 Except as otherwise provided in this Section, the arbitration shall be governed by the rules and practices of the American Arbitration Association, or a similar organization if the American Arbitration Association should not at the time exist.

24.5 Arbitration proceedings shall be held in Imperial, California, at a time and place to be selected by the arbitrators. The arbitrators shall hear evidence submitted by the Parties and may call for additional information which shall be furnished by the Party having such information. The arbitrators shall have no authority to call for information not related to the issues included in the dispute or to determine other issues not in dispute.

24.6 If there is only one arbitrator, his decision shall be binding and conclusive on the Parties. If there are three arbitrators, the decision of any two shall be binding and conclusive. The decision of the arbitrators shall contain findings regarding the issues involved in the dispute, including the merits of the positions of the Parties, the materiality of any default, and the remedy or relief to which a Party shall be entitled. The arbitrators may not grant any remedy or relief which is inconsistent with this Agreement, nor shall the arbitrators make findings or decide issues not in dispute.

24.7 The fees and expenses of the arbitrators shall be shared equally by the Parties, unless the decision of the arbitrator specifies some other apportionment. All other expenses and costs of the arbitration shall be borne by the Party incurring such expenses and costs.

24.8 Any decision or award granted by the arbitrators shall be final and judgement may be entered on it in any court of competent jurisdiction. This agreement to arbitrate shall be specifically enforceable.

Example 5: From a Supply Agreement

18.2 In the event any dispute, controversy, or difference of opinion, arises between the parties hereunder out of or in relation to or in connection with this Agreement or the breach thereof, the parties agree that all disputes arising in connection with the present Agreement shall be finally settled under the rules of conciliation and arbitration of the International Chamber of Commerce in Paris by three (3) arbitrators appointed in accordance with those rules. The place of arbitration shall be Paris and the language shall be English.

Example 6: From a Facility Lease Agreement

24.14.2 Appraisal Process. The appraisers thus appointed, each of whom must be a member of the American Institute of Real Estate Appraisers (or any successor organization thereto), shall, within forty-five (45) days after the date of the notice appointing the first appraiser, proceed to appraise the Leased Property to determine the Fair Market Value of the Leased Property as of the relevant date (giving effect to the impact, if any, of inflation from the date of their decision to the relevant date); provided, however, that if only one appraiser shall have been so appointed, or if two appraisers shall have been so appointed but only one such appraiser shall have made such determination within fifty (50) days after the making of the Lessee’s or the Lessor’s request, then the determination of such appraiser shall be final and binding upon the parties. If two appraisers shall have been appointed and shall have made their determinations within the respective requisite periods set forth above and if the difference between the amounts so determined shall not exceed ten per cent (10%) of the lesser of such amounts, then the Fair Market Value of the Leased Property shall be an amount equal to fifty percent (50%) of the sum of the amounts so determined. If the difference between the amounts so determined shall exceed ten percent (10%) of the lesser of such amounts, then such two appraisers shall have twenty (20) days to appoint a third appraiser, but if such appraisers fail to do so, then either party may request the American Arbitration Association or any successor organization thereto to appoint an appraiser within twenty (20) days of such request; and both parties shall be bound by any appointment so made within such twenty (20) day period. If no such appraiser shall have been appointed within such twenty (20) days or within ninety (90) days of the original request for a determination of Fair Market Value of the Leased Property, whichever is earlier, either the Lessor or the Lessee may apply to any court having jurisdiction to have such appointment made by such court. Any appraiser appointed by the original appraisers, by the American Arbitration Association or by such court shall be instructed to determine the Fair Market Value of the Leased Property within thirty (30) days after appointment of such Appraiser. The determination of the appraiser which differs most in terms of dollar amount from the determinations of the other two appraisers shall be excluded, and fifty percent (50%) of the sum of the remaining two determinations shall be final and binding upon the Lessor and the Lessee as the Fair Market Value of the Leased Property.

Example 7: From an Exclusive Distribution Agreement

12.2. Any difference or dispute arising out of or relating to this Agreement, or the breach thereof shall be settled solely and exclusively by the ICC arbitration in Zurich, Switzerland, and in accordance with the International Chamber of Commerce Arbitration Rules. The award shall be final and binding on both parties. The parties further agree that the number of arbitrators shall be three (3) selected from the ICC list of arbitrators chosen in accordance with the said rules. The language of the arbitration shall be English.

Example 8: From a License Agreement

14.4 Dispute Resolution

Any dispute or difference which may arise between the Parties at any time hereafter whether during the continuance in force of this Agreement or upon or after its termination, touching any matter or thing herein contained or the operation or construction of this Agreement or any matter or thing in any way connection with, arising from or in relation to this Agreement or the rights, duties or liabilities of the Parties hereunder shall be finally settled by arbitration in accordance with the International Arbitration Rules of the American Arbitration (“AAA”).

14.4(a) A reference to arbitration shall be to three (3) arbitrators.

14.4(b) The arbitration shall be held in Provo, State of Utah, United States of America and the language to be used in the arbitral proceedings shall be English.

14.4(c) Pending the commencement of the arbitral proceedings, either Party may apply, to the courts in Utah and/or Malaysia (which shall have non-exclusive jurisdiction) for the grant of interim injunctions and orders for the protection and preservation of property subject of or relating to this Agreement. For the purposes of this Section 14.4(c) and as provided in the Arbitration Rules of the AAA, arbitral proceedings shall be deemed to commence on the date when the administrator of the AAA receives notice of arbitration from the Party initiating the arbitration.

Example 9: From a Stock Purchase Agreement

(l) Arbitration. Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration in the State of California in accordance with the Rules of the American Arbitration Association, and judgment upon the award may be entered in any court having jurisdiction thereof pursuant to the provisions of the State of California.

Example 10: From an Engagement Agreement

XIV. ARBITRATION

The parties shall submit any dispute arising out of this Agreement, including the interpretation of or the enforcement of rights and duties under this Agreement, to final and binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association, in Los Angeles, California. At the request of any party, the arbitrators, attorneys, parties to the arbitration, witnesses, experts, court reporters, or other persons present at the arbitration shall agree in writing to maintain the strict confidentiality of the arbitration proceedings. Arbitration shall be conducted by a single, neutral arbitrator, or, at the election of any party, three neutral arbitrators, appointed in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitrator(s) shall be attorneys in practice for at least ten years, and experienced in the matter(s) being arbitrated. In any such arbitration, California Code of Civil Procedure Section 1283.05 (Right to Discovery; Procedure and Enforcement) shall be applicable. The award of the arbitrator(s) shall be enforceable according to the applicable provisions of the California Code of Civil Procedure. The arbitrator(s) shall have the same powers as those of a judge of the Superior Court of the State of California, shall be bound by the statutes and case law of the State of California, and shall render a decision as would a judge of a Superior Court of the State of California. Notwithstanding the foregoing, either party shall have the right to petition a court of competent jurisdiction, for (i) injunctive relief or other equitable remedies against the other for any violation or breach by such party of its obligations hereunder pending a decision by the arbitrator(s), and (ii) for a permanent injunction. If proper notice of any hearing has been given, the arbitrator(s) will have full power to proceed to take evidence or to perform any other acts necessary to arbitrate the matter in the absence of any party who fails to appear. EACH PARTY HERETO WAIVES THE RIGHT TO A JURY TRIAL.

Example 11: From a License Agreement

12.2 In the event of any controversy or claim arising out of or relating to any provision of this Agreement or the breach thereof, the parties shall try to settle such conflicts amicably between themselves. Subject to the limitation stated in the final sentence of this section, any such conflict which the parties are unable to resolve shall be settled through arbitration conducted in accordance with the rules of the American Arbitration Association. The demand for arbitration shall be filed within a reasonable time after the controversy or claim has arisen, and in no event after the date upon which institution of legal proceedings based on such controversy or claim would be barred by the applicable statutes of limitation. Such arbitration shall be held in Chicago, Illinois. The award through arbitration shall be final and binding. Either party may enter any such award in a court having jurisdiction or may make application to such court for judicial acceptance of the award and an order of enforcement, as the case may be. Notwithstanding the foregoing, either party may, without recourse to arbitration, assert against the other party a third-party claim or cross-claim in any action brought by a third party, to which the subject matter of this Agreement may be relevant.

Example 12: From a Ground Lease

17.13 Arbitration.

A. Arbitration. In the event Lessor and Lessee cannot agree on any matter in this Lease other than the determination of Fair Rental Value pursuant to Section 3.2, above, arbitration shall be conducted under the rules of the American Arbitration Association in the manner prescribed in this Section 17.13.

B. Appointment of Arbitrators. Within five (5) days after written request of either Party, Lessor shall appoint in writing an arbitrator and give written notice thereto to Lessee, and within five (5) days after the service of such notice, Lessee shall in like manner appoint an arbitrator and give notice in writing thereof to Lessor, or in case of the failure of either Party hereto so to do, the other Party shall have the right to apply to the District Court of Clark County, Nevada, to appoint an arbitrator to represent the defaulting Party. The two (2) arbitrators thus appointed (in either manner) shall select and appoint in writing a third arbitrator and give written notice to Lessor and Lessee, or if within five (5) days after the appointment of such second arbitrator, the two (2) arbitrators shall fail to appoint a third, then either Party hereto shall have the right to make application to the District Court to appoint such third arbitrator.

C. Hearing. The three (3) arbitrators so appointed (in either manner) shall promptly fix a convenient time and place in Clark County for hearing the matter to be arbitrated and shall give written notice thereof to each Party hereto at least ten (10) days prior to the date so fixed, and said arbitrators shall with reasonable diligence hear and determine the matter in accordance with the provisions hereof and of the statutes and judicial decisions of the State of Nevada at the time applicable thereto, and shall execute and acknowledge their award in writing and cause a copy to by delivered to each of the Parties. Such award may include equitable remedies.

D. Enforcement of Award. The award of a majority of such arbitrators shall determine the question arbitrated and shall be binding upon the Parties hereto and shall be enforceable in accordance with Nevada law.

E. New Arbitrators. If two (2) of the three (3) arbitrators first appointed shall fail to reach an agreement in the determination of the matter in question, the matter shall be decided by three (3) new arbitrators, who shall be appointed and shall proceed in the same manner, and the process shall be repeated until a decision is finally reached by two (2) of the three (3) arbitrators selected.

F. Arbitration Fees. Each of the Parties shall pay for the services of its appointee and one-half of the fee charged by the arbitrator selected by their appointees and of all other proper costs of arbitration, with the exception of attorneys’ fees and witnesses’ fees.

Example 13: From a License Agreement

10.6. Any disagreement or dispute which may arise between the parties in relation to or connection with this Agreement shall be settled amicably and expeditiously by good faith negotiation. Any such dispute which cannot be so settled within 30 days after the commencement of negotiation shall be referred to non-binding mediation by a single, independent mediator who is an experienced in business relations of the type of this Agreement, to be appointed by agreement of the parties. Any such dispute which cannot be so settled within 45 days of the appointment of the mediator shall be referred to and finally settled by arbitration by three arbitrators, one to be appointed by each party and the third to be appointed by the first two, in accordance with the arbitration rules of the Stockholm Chamber of Commerce. All decisions, determinations and rulings of the arbitrators shall be final and shall be fully and irrevocably accepted by the parties. Any such arbitration shall be held in Stockholm, Sweden. The parties shall use their best efforts to conduct all dispute resolution procedures under this Agreement as expeditiously, efficiently and cost-effectively as possible.

Example 14: From a Financing Agreement

4.1 Alternative dispute resolution.

a. THE PARTIES TO THIS AGREEMENT HEREBY EXPRESS THAT ALL DISPUTES, CONTROVERSIES OR CLAIMS OF ANY KIND AND NATURE, ARISING OUT OF OR IN ANY WAY RELATED TO THE WITHIN AGREEMENT, ITS INTERPRETATION, PERFORMANCE OR BREACH, SHALL BE RESOLVED EXCLUSIVELY BY THE FOLLOWING ALTERNATIVE DISPUTE RESOLUTION MECHANISMS:

Arbitration: You and we agree that any and all disputes, claims and controversies of any kind and nature pertaining to this Agreement, shall be settled by binding arbitration. Notwithstanding our agreement to arbitrate, Regions Bank may exercise all of the specific rights and remedies granted to it under this Agreement with respect to an Event of Default by you. The party seeking to arbitrate shall select one of the following three arbitration administrators: the National Arbitration Forum (“NAF”); the American Arbitration Association (“AAA”) or JAMS.

The arbitrator shall be a lawyer with more than ten years experience or a retired or former judge. The arbitration shall be conducted according to the rules and procedures of the selected administrator. The costs of the above-stated arbitration shall be borne by the party against whom an award is issued and in favor of the prevailing party. In either event, each party shall bear the cost of its own attorney’s fees and costs.

b. THE PARTIES UNDERSTAND AND AGREE (i) THAT THIS ARBITRATION AGREEMENT IS MADE PURSUANT TO A TRANSACTION INVOLVING INTERSTATE COMMERCE AND SHALL BE GOVERNED BY THE FEDERAL ARBITRATION ACT, 9 U.S.C SECTION 1-16 (THE “FAA”); (ii) THAT THE ARBITRATOR SHALL APPLY APPLICABLE SUBSTANTIVE LAW CONSISTENT WITH THE FAA; (iii) THAT EACH OF THEM IS WAIVING RIGHTS TO SEEK REMEDIES IN COURT, INCLUDING THE RIGHT TO A JURY TRIAL; (iv) THAT PRE-ARBITRATION DISCOVERY IN ARBITRATION PROCEEDINGS IS GENERALLY MORE LIMITED THAN AND DIFFERENT FROM COURT PROCEEDINGS; (v) THAT THE ARBITRATORS’ AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING, AND (vi) EITHER PARTY’S RIGHT TO APPEAL OR TO SEEK MODIFICATION OF RULINGS BY THE ARBITRATORS, IS STRICTLY LIMITED TO APPEALS PERMITTED BY THE FAA.

c. THE VENUE FOR ARBITRATION UNDER THIS PARAGRAPH SHALL BE IN THE CITY OF BIRMINGHAM, STATE OF ALABAMA.

Example 15: From a Sale Agreement

This Contract shall be governed by the laws of the State of Florida. Any controversy or claim arising out of or relating to this Contract or the breach thereof shall be settled by arbitration conducted in Tampa, Florida in accordance with the Commercial Arbitration Rules of the American Arbitration Association now in effect. Any determination made by the arbitrator(s) shall be final and binding. Judgment on any award may be entered in any court of competent jurisdiction. The arbitrators shall have no authority to award punitive or exemplary damages.