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Whether the parties are already in dispute or they simply want to lay the ground rules in advance, a strong arbitration agreement should provide them with a dispute resolution process that minimizes time and expense while ensuring each party's interests remain well protected. The following information provides additional details on some of the key aspects of the agreement.

Parties Involved

The first question will help to determine the appropriate dispute resolution rules to apply in your agreement. One size does not fit all when it comes to dispute resolution. For instance, the resolution process for disputes among construction industry professionals is different than for disputes between a labor union and a business.

Each option has its own set of rules provided by the American Arbitration Association (AAA), which are available for review at any time on its website. You may also choose to leave the rules unspecified and allow the mediator or arbitrator to determine the most applicable set of rules to apply.

Existing Disputes

Here you will indicate whether the parties are signing this agreement in order to set up a resolution process for an existing dispute. When prompted, provide details on the nature of the dispute. This should be a general statement that both parties agree to.

Dispute Process

This agreement sets up a typical alternative dispute resolution process for parties seeking to resolve disputes outside of court. The dispute process has three stages: 1) voluntary negotiation, 2) voluntary mediation, and 3) mandatory or voluntary arbitration (depending on your answer).

In this context, "voluntary" means that both parties have to agree to it for it to occur. Therefore, the first two stages can be entirely skipped if either party chooses to opt out. However, each stage gets more time consuming and expensive than the previous one, so it is usually in the parties best interests to proceed in order.

Negotiation

Voluntary negotiation is simply informal negotiation between the parties. The parties usually decide on a time, a location, and discussion points beforehand, and then the relevant personnel meet along with any attorneys or representatives in order to try to reach a resolution.

Mediation

Voluntary mediation is more structured, and the AAA has specific procedures for conducting it. A neutral mediator is selected to help the parties reach a resolution, but they do not have the power to issue a binding judgment or award on the dispute.

Arbitration

If you choose to make arbitration voluntary, then both parties must agree in order to start the proceedings. However, once the parties agree to submit to arbitration, or if you choose to make arbitration mandatory, then the ruling of the arbitrator will be final and binding. If a party refuses to cooperate with a ruling, then the other party can enforce the judgment in a court of law (and also recover any legal fees and costs for having to do so).

Emergency Measures

In some situations, a party may need a fast or immediate ruling in order to stop the other party from infringing on its rights or protect its property. In this case, that party can either apply to a court for an injunction or preliminary relief, or, if arbitration is mandatory, it can apply to have an emergency arbitrator appointed by the AAA who will follow the AAA emergency rules to provide relief for the party.

Type of Disputes

Most commonly, parties sign this agreement in relation to a contract between them. However, these agreements are sometimes used to cover disputes that relate to the parties relationship. For instance, parties may wish to use this agreement for their ongoing business or other relationship, such as employer and employee, service provider and service receiver, labor union and business, etc.

You may also want to use this agreement in relation to an activity or event or even multiple activities or events. This can include any potential scenario where disputes may occur, but it most typically involves events where at least one of the parties is acting in an individual capacity rather than as a business.

Executing the Agreement

To execute the agreement, simply have each party sign in the signature section where indicated. Make sure that each party gets a copy of the signed agreement for safekeeping.

The American Arbitration Association

The American Arbitration Association (AAA) is a not-for-profit administrative organization that has a long history of providing mediation and arbitration services throughout the United States.

LegalNature's agreement is set up to allow the parties to use the AAA's services, and we recommend that you take advantage of the AAA's experience and expertise to help resolve your disputes. Their fees for mediation and arbitration services are available on their website, with mediation normally being the least expensive alternative. With arbitration, note that the AAA can provide expedited proceedings (called "desk arbitration") under certain circumstances.

That said, both parties can always agree to use another administrative organization (such as USA&M) or an independent mediator or arbitrator. However, doing so may leave the parties without a predictable process for resolving their dispute.

Registering with the AAA

Although not required to do so in order to use their services, it is recommended that dispute resolution agreements be registered with the AAA. Upon registration, the AAA will review your agreement to make sure it complies with their standards. This will help expedite the dispute resolution process.

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Frequently Asked Questions

What are arbitration agreements?

Arbitration agreements are legal documents used to specify how disputes between two parties will be handled, protecting the best interests of each party. Parties signing an arbitration agreement agree to settle disputes through an arbitration proceeding rather than litigating the matter in court.

Why use an arbitration agreement?

Arbitration agreements are legal documents used to specify how disputes between two parties will be handled, protecting the best interests of each party. Parties signing an arbitration agreement agree to settle disputes through an arbitration proceeding rather than litigating the matter in court.

Who should use an arbitration agreement?

An arbitration agreement s a written legal document in which the people or companies signing the agreement specifically state how disputes or disagreements will be resolved. Generally speaking, arbitration agreements are used to limit, or eliminate, the chances of having to go to court to resolve a dispute.

What is arbitration?

Arbitration is simply an alternative means of settling disputes outside of a courtroom. When parties sign an arbitration agreement, they are agreeing that any legal claims that arise out of a relationship or transaction will be handled through arbitration rather than through lawsuits in court.

The process of arbitration is similar to a trial proceeding in court. The parties often have attorneys representing them, and they exchange information, question witnesses, and present each side of the story. However, arbitration proceedings are generally less formal than courtroom litigation. Instead of being heard by a judge and a jury, a case that goes to arbitration is heard by an arbitrator (or a panel of arbitrators).

Arbitration is also usually "binding," which means the decision of the arbitrator(s) is final and cannot be appealed.

What are the benefits of using an arbitration agreement?

Arbitration agreements can help both parties by removing the potential need for costly lawsuits in the future if a dispute arises. The parties to an arbitration agreement agree to handle the dispute in a more cost-effective and timely manner than would likely be the case in a court battle.

When a dispute goes to court, it is a matter of public record. That is not the case when a matter is arbitrated. Testimony in an arbitration matter is not public, nor are the specific details about the dispute made public.

Are there disadvantages to using an arbitration agreement?

While there are many reasons to use arbitration agreements, parties should also understand the potential downsides.

As arbitration decisions are legally binding and there is not an appeals process, both parties have to accept the arbitrator's decision as final. This may be positive or negative for the parties depending on the situation.

Also, the information exchanged and presented in an arbitration proceeding is sometimes more limited than what could be presented or exchanged in court.

What should be included in an arbitration agreement?

Arbitration agreements do not have to be long, but they should include the following key details:

  • The date of the agreement
  • The parties to the agreement
  • Whether the agreement covers a current dispute or is instead designed to govern how future disputes will be decided
  • A statement that disputes will be decided through binding arbitration rather than being litigated in court
  • How arbitrators will be chosen and how many arbitrators will hear disputes
  • Whether there are certain rules that will be used, such as those promulgated by the American Arbitration Association (AAA). Alternatively, an arbitration agreement might state that the arbitrator can decide which rules should be applied when hearing and deciding an arbitration dispute.

Both parties need to sign the agreement to make it legal, and both parties should maintain copies of the signed agreement for their records.

Should arbitration agreements be fair to both parties?

Arbitration agreements should always be fair to both parties. As with any type of legal document, both parties to an arbitration agreement should read it carefully and understand what they are agreeing to.

When negotiating an arbitration agreement, these provisions can help to make it more fair and balanced:

  • Choice of arbitrator – Choosing the arbitrator(s) who will hear and decide a dispute should not be one-sided. Instead, both parties should agree on the arbitrator(s), who should be neutral and free from potential conflicts of interest. Often, the selection procedures are determined by the governing rules stated in the agreement, for instance the American Arbitration Association (AAA).
  • Costs – The arbitration agreement should spell out who is responsible for paying the costs of arbitration. In cases like employment situations where the employer holds more power in the relationship, the employer should be the party paying for arbitration.
  • Representation – Both parties to an arbitration agreement should have the right to legal representation, and the agreement should not waive that right.

Separate arbitration agreements vs. provisions in larger agreements

Sometimes, it makes sense to include an arbitration provision inside another legal document, such as a purchase agreement or a loan agreement. In these situations, the parties are agreeing that future disputes will be decided through binding arbitration. Employment contracts may also be structured to include arbitration provisions.

In other situations, including situations in which a dispute has already been raised, it may be preferable to sign a separate arbitration agreement.

How do I create an arbitration agreement?

Creating an arbitration agreement through LegalNature is fast and can be done in just a few easy steps. Simply follow LegalNature's step-by-step guidance. At the end of the process, download your completed document for signatures.

How are arbitrators chosen and who chooses them?

Depending on the state you are in, the court may choose an arbitrator for you or the attorneys will work together to choose an arbitrator from a list of court-approved arbitrators. In some cases, the parties may state the method of selection and the number of arbitrators in an arbitration agreement or clause. A common selection method for when the parties cannot agree on an arbitrator dictates that both sides choose one arbitrator and then the two chosen arbitrators choose a third arbitrator. Often, either party may unilaterally decide to use this method in order to ensure that the arbitrator has no interest in the matter.

Normally, the parties have no need to speak directly to the arbitrators. If the opposing party has an attorney and you do not, be sure to advise opposing counsel that you wish to see the list of arbitrators. You may be able to research the arbitrator online through his or her website in order to determine if the arbitrator has experience in cases like yours and to learn more about the arbitrator's work. You cannot choose someone that you personally know to arbitrate your case. In many cases, the court must agree to the arbitrator that you and the opposing party choose.

If you do happen to know the arbitrator personally, it is up to the arbitrator to decline the job, but it may be in your best interest to ensure that a different arbitrator is selected. If a court learns that you had a conflict of interest because you and the arbitrator know each other, it could render the decision invalid and could be vacated by the court. This would cost more money and attorney’s fees. Additionally, sanctions may be imposed upon you. The court could even impose sanctions on the arbitrator should he or she knowingly enter into the contract to arbitrate between you and the opposing party.

What happens if a party fails to pay as required in the decision? How are arbitration awards enforced?

Once the arbitration award has been entered by the court, it is enforceable the same as any other court order, whether in federal or state court. If the opposing party is not complying with the arbitration agreement and subsequent order, you will need to file a motion to ask the court to enforce the terms of the agreement.

If, after the court enters an order to enforce the agreement, the opposing party is still in non-compliance, you may file contempt motions. Depending on the court and state in which you are filing, the contempt motion may be for civil contempt or criminal contempt. In some cases, criminal contempt motions may be filed in civil cases. Depending on the type of contempt filed, the court could order the party who is not in compliance to pay fines or receive severe sanctions.

What is the difference between mediation and arbitration?

Mediation and arbitration may or may not be binding, depending on the dispute resolution clause or contract agreed upon between the parties. In most cases, mediation is not binding. Both must use a neutral third party who has no personal interest in the case.

Furthermore, in mediation, the mediator does not judge the case. Instead, the mediator helps the parties negotiate a solution to the issue and eventually come to an agreement. Often, the parties or their lawyers will then put their agreement down in writing that both parties sign.

On the other hand, with arbitration, the arbitrator may act as the judge by making decisions about evidence and giving written opinions. Those opinions may or may not be binding. Other differences include the following:

  • Arbitration may be decided by a panel of arbitrators or a single arbitrator. If a case goes to mediation, there is generally just one mediator.
  • An arbitrator may render a decision on the matter, while a mediator facilitates a negotiation.
  • Arbitration ends when the arbitrator hands down a decision. Mediation ends when the parties reach a settlement or an impasse.
  • A court trial and judgment may be substituted by binding arbitration. Generally, with mediation, the trial is stayed pending the outcome of the mediation.

How much does arbitration cost, and who pays?

While arbitration may seem expensive, it is almost always less expensive than a trial. Arbitrators charge per diem—on a daily basis. Their fees may range from $1,000 to $2,000 per day, plus expenses. The variation is due to the geographic location and the amount of experience the arbitrator has. Expenses may include travel expenses and meals that are incurred with the arbitration hearing. Additionally, arbitrators charge for the time they travel to the location of the arbitration. Travel time is usually prorated.

Additionally, each party is responsible for his or her own witness costs and the attorney’s fees and costs associated with arbitration. Arbitrators often have their rates published on their websites. Rates may also be available from the Federal Mediation and Conciliation Service or the American Arbitration Association.

The rate given is usually the rate for the full arbitration. The usual practice is for each party to pay half of the total fees and costs unless otherwise agreed to. In some cases, the person or entity who does not prevail pays the full cost of arbitration. In other cases, the percentage split may be something other than half and half, depending on the case and the parties' incomes. This also applies to attorney's fees and costs.

Before agreeing to arbitration, make sure you answer the following questions:

  • What are the costs and fees associated?
  • How will the cost of the arbitration be split between you and the opposing party?
  • How will the arbitrator or arbitrators be selected?
  • Where will the arbitration take place?
  • Will the arbitrator’s decision be binding on both parties?

How long does it take to arbitrate a claim from start to finish?

A case could take a few months to over a year. It is not unheard of for cases to take a couple of years, especially if a lot of evidence needs to be presented. If the parties agree to arbitrate or have signed a mandatory arbitration agreement or clause within a contract, that time could be significantly shortened.

Another factor that could move arbitration out is if a party files emergency motions or administrative motions with the court. If the court wants to hear a motion, you will not be able to arbitrate until all such motions are heard and decided upon.

Just as with a court hearing, arbitration cannot be held without first completing all of the discovery. Once the discovery phase is complete, all discovery should be forwarded to the arbitrator to review so that he or she may use it in making an informed decision on your matter.

As for the arbitration hearing itself, the length depends on the complexity of the case, including the amount of discovery. An arbitration could take as little as an hour or two or it could last for several days.

The time frame can also change depending on the particular set of arbitration rules that the parties choose to follow. For instance, if the parties are using the American Arbitration Association’s Commercial Arbitration Rules and Mediation Procedures, then their case may be eligible for arbitration under the Expedited Procedures section if no claim or counterclaim exceeds $75,000.

Is there any appeal process?

Arbitration does not have an appeal process but does have a procedure to overturn a decision. Although rarely used, appeals can occur for the following common reasons:

  • The award was obtained by fraud, corruption, or some other undue means.
  • The arbitrators were partial to one of the parties or were corrupt.
  • The arbitrators refused to postpone the arbitration hearing when one or both parties or their attorneys gave sufficient cause, or the arbitrators refused to hear evidence that was material to the matter at hand. The award may also be vacated if the actions or inactions of the arbitrators caused prejudice to the rights of either party.
  • If the arbitrators went above their powers or “imperfectly executed” the powers so that the award could not be mutual, definite, or final.

Is arbitration binding?

Whether arbitration is binding or not depends on the agreement signed prior to arbitration—usually a contract—or whether you and the other party agree to binding arbitration prior to the start of the hearing. If you agree to binding arbitration, then the decision is final and it may only be overturned or reviewed by the court if an appeal is properly filed.

If you choose non-binding arbitration, you have the option to reject the award and ask for a trial. Sometimes, the parties agree to non-binding arbitration to better assess the strengths of their cases in a potential lawsuit. In this case, if the parties do agree to the award, it may become binding. If the parties do not ask for a trial in the required time, the non-binding arbitration award becomes binding.

Voluntary arbitration vs. mandatory arbitration

Arbitration may be voluntary or mandatory. In voluntary arbitration, the parties agree to binding or non-binding arbitration after the cause arises and all options to solve the matter have been evaluated. If the arbitration is mandatory, it is because the parties signed a contract agreeing to arbitrate in the event that an issue arises or a court orders arbitration. The arbitration may be binding or non-binding.

Is it better to have a single arbitrator or a panel of arbitrators?

As of 2015, research by Naomi Gershoni, Ph.D., discovered that a single arbitrator vs. a panel of arbitrators had not been statistically compared previously. Gershoni’s analysis found that a panel of arbitrators was preferred when the awards and stakes of the award were higher. Ultimately, this question is up to the parties to decide.

The choice between a single arbitrator and a panel of arbitrators has pros and cons:

  • More arbitrators means the arbitration will cost more.
  • Many people believe that using a panel of three arbitrators reduces the chances of an unbalanced or unfair award.
  • Using a panel of arbitrators allows the arbitrators to discuss the merits of the case and possibly come to a fairer award.
  • Gershoni found that single arbitrators often gave smaller awards; however, a panel dismissed more claims, but the awards were higher on claims that were not dismissed.
  • More arbitrators may come to a decision faster if they all agree on the award, but may take longer and come up with a more balanced award if they do not agree.

If you do have a choice of whether to go with a single arbitrator or a panel, take these factors into consideration:

  • The chances of winning the case
  • The amount of money involved in the case
  • The potential amount of the award
  • Whether you believe that more minds equal a fairer and more balanced decision

Do rules of evidence apply in arbitration?

Generally, the rules of evidence do not apply in arbitration. AAA Commercial Arbitration Rule R-34(a) states, “Conformity to legal rules of evidence shall not be necessary.” Arbitrators are required to abide by certain legal privileges, such as attorney-client communications.

Arbitrators may also exclude evidence that is “cumulative or irrelevant.” To come to a fair ruling, an arbitrator may exclude evidence such as hearsay when more reliable evidence could have been procured through discovery or a deposition following formal court procedures. In a deposition, the opposing party would have had the ability to cross-examine the declarant to find out if the hearsay was relevant or just a rumor.

If a party challenges the validity of the contract that contains the arbitration clause, who decides that validity challenge? An arbitrator or a judge?

According to Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 69-73 (2010), the court ruled that the arbitrator should be the one to decide the validity of the arbitration clause. However, upon appeal, the Ninth Circuit reversed the decision based on rulings in Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1264 (9th Cir. 2006)(en banc) and Bukeye Check Cashing, Inc., v. Cardegna, 546 U.S. 440, 446 (2006). The Ninth Circuit found that if a party is challenging only the validity of the arbitration clause and not the entire arbitration agreement, the court should resolve the issue, not an arbitrator.

What is the difference between arbitration hearings and jury trials?

Several factors differentiate an arbitration hearing and a jury trial:

  • An arbitrator does not have to go by the strict rules of evidence that the parties and their attorneys must abide by during a bench trial or jury trial.
  • Hearsay and other evidence that would not be allowed in a jury or bench trial may be allowed in an arbitration hearing.
  • The arbitrator's decision in binding arbitration must be followed, just as a court order. However, the arbitrator's decision does not have to be based on law, which it would be if issued by a judge.
  • Any decision made by the court, whether in a jury trial or bench trial, may be appealed. A decision reached through arbitration is usually not subject to appeal except in rare circumstances.

What should I look out for when signing contracts?

If you feel that you would rather have a matter heard in court instead of in front of an arbitrator, be sure to read any contracts you sign, such as an employment contract and credit card contract. Often, contracts have an arbitration clause. If you sign a document with an arbitration clause, you are agreeing that should any differences arise between you and the other party, you will go to arbitration instead of having your matter heard in court.

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Checklist

Step 1: Gather Information

As you complete your arbitration agreement, you will need to provide certain relevant information. This includes party names and addresses and details regarding the nature of the dispute.

Step 2: Answer Key Questions

Use the information you collected to complete the arbitration agreement. We make this easy by guiding you each step of the way and helping you to customize your document to match your specific needs. The questions and information we present to you dynamically change depending on your answers and the state selected.

Step 3: Review and Sign

It is always important to read your document thoroughly to ensure it matches your needs and is free of errors and omissions. After completing the questionnaire, you can make textual changes to your document by downloading it in Microsoft Word. If no changes are needed, you can simply download the PDF version and sign. These downloads are available by navigating to the Documents section of your account dashboard.

Step 4: Distribute and Store Copies

At a minimum, all parties that sign the document should receive a copy once it is fully executed (everyone has signed). Other interested parties may need or want copies as well. Be sure to store your copy in a safe location. It is a good idea to keep both a physical and electronic copy.

Step 5: Periodically Review

It is easy to forget the ins and outs of your arbitration agreement. Periodically reviewing it will help you stay familiar with any responsibilities or requirements so that you can determine when it needs changes or additions.

Ready To Get Started? Create an Arbitration Agreement