Arbitration is a formal method of dispute resolution involving a neutral person or entity who makes a binding decision (commonly called binding arbitration). The neutral third party (the 'arbitrator,' 'arbiter,' or 'arbitral tribunal') renders the decision in the form of an 'arbitration award'. An arbitration award is legally binding on both sides and enforceable in local courts, unless all parties stipulate that the arbitration process and decision are non-binding.
Arbitration is often used for the resolution of commercial disputes, particularly in the context of international commercial transactions. In certain countries, such as the United States, arbitration is also frequently employed in consumer and employment matters, where arbitration may be mandated by the terms of employment or commercial contracts and may include a waiver of the right to bring a class action claim. Mandatory consumer and employment arbitration should be distinguished from consensual arbitration, particularly commercial arbitration.
There are limited rights of review and appeal of arbitration awards. Arbitration is not the same as judicial proceedings (although in some jurisdictions, court proceedings are sometimes referred as arbitrationsIn the United Kingdom, small claims in the county court are dealt with by a procedure called "small claims arbitration", although the proceedings are held in front of a district judge, paid for by the state. In Russia, the courts dealing with commercial disputes are referred to as the High Court of Arbitration of the Russian Federation, although it is not an arbitral tribunal in the true sense of the word.), alternative dispute resolution,Although all attempts to determine disputes outside of the courts are "alternative dispute resolution" in the literal sense, ADR in the technical legal sense, is the process whereby an attempt is made to reach a common middle ground through an independent mediator as a basis for a binding settlement. In direct contrast, arbitration is an adversarial process to determine a winner and a loser in relation to the rights and wrongs of a dispute. expert determination, or mediation (a form of settlement negotiation facilitated by a neutral third party).
Advantages and disadvantages
Parties often seek to resolve disputes through arbitration because of a number of perceived potential advantages over judicial proceedings. Companies often require arbitration with their customers but prefer the advantages of courts in disputes with competitors. Prevalent advantages of arbitration over litigation involve: Most importantly, the parties' ability to choose what substantive and procedural law governs the arbitration. This is often called the principle of 'party autonomy'. In contrast to litigation, where one cannot "choose the judge", arbitration allows the parties to choose their own tribunal, since it is the parties who appoint the arbitrators. This is especially useful when the subject matter of the dispute is highly technical: arbitrators with an appropriate degree of expertise (for example, quantity surveying expertise, in the case of a construction dispute, or expertise in commercial property law, in the case of a real estate disputeSee for example the arbitration service offered by Falcon Chambers, the specialist property barristers chambers – www.falcon-chambersarbitration.com.) can be chosen. Arbitration is supposed to be faster than litigation. Arbitral proceedings (other than investor-state arbitration) and arbitral awards can be made confidential. In arbitral proceedings the language of arbitration may be chosen, whereas in judicial proceedings the official language of the country of the competent court will be automatically applied. Because of the provisions of the New York Convention 1958, arbitration awards are generally easier to enforce in other nations than court verdicts. In most legal systems there are limited avenues for appeal of an arbitral award, which is sometimes an advantage because it limits the duration of the dispute and any associated liability.
Some of the disadvantages include: Agreeing to arbitrate often implies a waiver of the right to bring the same dispute to a court. This has been said to exacerbate imbalances of power between corporations and individuals as courts play a role in leveling the field between sophisticated and unsophisticated parties. Arbitration agreements are often difficult to identify in consumer and employee agreements. There is sometimes a disconnection between the presumption of confidentiality and the realities of disclosure and publicity imposed by the arbitrators, and even the parties themselves. If the arbitrator or the arbitration forum depends on the corporation for repeat business, there may be an inherent incentive to rule against the consumer or employee in favour of the corporation. There are limited avenues for appeal, an erroneous decision will therefore be harder to overturn. In some legal systems, arbitration awards have fewer enforcement options than judgments; although in the United States arbitration awards are enforced in the same manner as court judgments and have the same effect. Arbitrators may struggle to enforce interlocutory measures against parties. Parties have an easier time taking steps to avoid enforcement of member or a small group of members in arbitration due to increasing legal fees, without explaining to the members the adverse consequences of an unfavorable ruling. Discovery may be more limited in arbitration or entirely nonexistent. Enforcing arbitral awards generally requires a court procedure, this may increase costs, particularly where a party attempts to challenge the award at this stage.
Arbitrability
By their nature, the subject matter of some disputes is not capable of arbitration. In general, two groups of legal procedures cannot be subjected to arbitration: Procedures which necessarily lead to a determination which the parties to the dispute may not enter into an agreement upon:Cf. e.g. Section 1030 subsection 1 of the German Zivilprozessordnung. Some court procedures lead to judgments which bind all members of the general public, or public authorities in their capacity as such, or third parties, or which are being conducted in the public interest. For example, until the 1980s, antitrust matters were not arbitrable in the United States.Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) Matters relating to crimes, status and family law are generally not considered to be arbitrable, as the power of the parties to enter into an agreement upon these matters is at least restricted. However, most other disputes that involve private rights between two parties can be resolved using arbitration. In some disputes, parts of claims may be arbitrable and other parts not. For example, in a dispute over patent infringement, a determination of whether a patent has been infringed could be adjudicated upon by an arbitration tribunal, but the validity of a patent could not: As patents are subject to a system of public registration, an arbitral panel would have no power to order the relevant body to rectify any patent registration based upon its determination. Some legal orders exclude or restrict the possibility of arbitration for reasons of the protection of weaker members of the public, e.g. consumers. Examples: German law excludes disputes over the rental of living space from any form of arbitration, while arbitration agreements with consumers are only considered valid if they are signed by either party,To be correct: certain form, as defined by statute, of an electronic signature using a chip card and a PIN code is also sufficient and if the signed document does not bear any other content than the arbitration agreement.Section 1031 subesction 5 of the Zivilprozessordnung. The restriction does not apply to notarized agreements, as it is presumed that the notary public will have well informed the consumer about the content and its implications.
Arbitration agreement
Arbitration agreements are generally divided into two types: Agreements which provide that, if a dispute should arise, it will be resolved by arbitration. These will generally be normal contracts, but they contain an arbitration clause Agreements which are signed after a dispute has arisen, agreeing that the dispute should be resolved by arbitration (sometimes called a "submission agreement") The former is the far more prevalent type of arbitration agreement. Sometimes, legal significance attaches to the type of arbitration agreement. For example, in certain Commonwealth countries (not including England and Wales), it is possible to provide that each party should bear their own costs in a conventional arbitration clause, but not in a submission agreement.
Parties to a non-contractual dispute may enact a submission agreement where the circumstances for an advance agreement to submit to arbitration did not arise, for example in tort cases such as personal injury claims.C. H. Spurin (2008), Substantive & Procedural Law of Abritration: Chapter Two – The Arbitration Agreement, p. 3, accessed on 16 January 2025
In keeping with the informality of the arbitration process, the law is generally keen to uphold the validity of arbitration clauses even when they lack the normal formal language associated with legal contracts. Clauses which have been upheld include: "arbitration in London – English law to apply"Swiss Bank Corporation v Novrissiysk Shipping 1 Lloyd's Rep 202 "suitable arbitration clause"Hobbs Padgett & Co v J C Kirkland (1969) 113 SJ 832 "arbitration, if any, by ICC Rules in London".Mangistaumunaigaz Oil Production v United Kingdom World Trade 1 Lloyd's Rep 617
The courts have also upheld clauses which specify resolution of disputes other than in accordance with a specific legal system. These include provision indicating: That the arbitrators "must not necessarily judge according to the strict law but as a general rule ought chiefly to consider the principles of practical business"Norske Atlas Insurance Co v London General Insurance Co (1927) 28 Lloyds List Rep 104 "internationally accepted principles of law governing contractual relations"Deutsche Schachtbau v R'As al-Khaimah National Oil Co 1 AC 295
Agreements to refer disputes to arbitration are generally presumed to be separable from the rest of the contract. This means that an issue of validity pertaining to the contract as a whole will not automatically vitiate the validity of the agreement to arbitrate. For example, in disputes on a contract, a common defence is to plead the contract is void and thus any claim based upon it fails. It follows that if a party successfully claims that a contract is void, then each clause contained within the contract, including the arbitration clause, would be void. However, in most countries, the courts have accepted that: A contract can only be declared void by a court or other tribunal; and If the contract (valid or otherwise) contains an arbitration clause, then the proper forum to determine whether the contract is void or not, is the arbitration tribunal.For example, under English law see Heyman v Darwins Ltd. AC 356
This protects the tribunal's ability to arbitrate beyond termination of the contract. Arguably, it is necessary to ensure that disputes are arbitrated rather than litigated—without such a clause, a dispute arising out of a contract will necessarily be litigated.