What Is an Arbitration Clause?

An arbitration clause requires specified disputes to be decided through arbitration rather than ordinary court proceedings.

This explanation focuses on business contracts in England and Wales.

Lowdown

An independent arbitrator, or a panel, decides the dispute and issues an award, meaning a formal decision. Unless the parties agree otherwise, the award is generally final and binding, although limited rights to challenge or appeal may apply.^[1]

For the Arbitration Act 1996 to apply, the arbitration agreement must generally be in writing or evidenced in writing. It does not necessarily need to be signed.^[1]

Why It Matters

Arbitration is generally private, which can help with commercially sensitive disputes. However, privacy does not guarantee complete confidentiality. Courts can still become involved in enforcing awards and dealing with certain challenges.^[2]

Arbitration can also involve additional costs, including the arbitrator's fees, an institution's fees and the parties' legal costs. The legal grounds for challenging or appealing an award are limited.^[2][3]

If someone starts court proceedings over a dispute covered by an arbitration agreement, the other party can generally ask the court to pause those proceedings so the dispute can be resolved through arbitration.^[1]

For smaller businesses, consider whether arbitration is proportionate to the value and complexity of the contract. Check how the arbitrator is appointed, where arbitration takes place and who may have to pay the costs.

Our Conclusion

Arbitration can offer privacy and a specialist process, but it can also add cost and limit opportunities to appeal. Check which disputes the clause covers and whether the process suits the deal.

Sources

[1] Arbitration Act 1996, section 5: Agreements to be in writing, section 9: Stay of legal proceedings and section 58: Effect of award

[2] Civil Procedure Rules, Part 62: Arbitration Claims and Arbitration Act 1996, section 67: Substantive jurisdiction, section 68: Serious irregularity and section 69: Appeal on point of law

[3] Arbitration Act 1996, section 59: Costs of the arbitration