An arbitration clause is a contract provision that requires certain disputes to be resolved in arbitration rather than court. In plain language, it is a term that changes the forum and procedure for handling covered disputes.
Why It Matters
Arbitration clauses matter because dispute resolution terms can shape cost, timing, confidentiality, discovery scope, and appeal rights. Two contracts may involve the same business deal but lead to very different dispute paths depending on whether they require arbitration, allow class proceedings, or specify a particular arbitral forum.
The term is also important because readers sometimes focus only on the business promises and overlook the procedural clauses at the end of the agreement. Those provisions can strongly affect leverage once a dispute begins.
Where It Appears
Arbitration clauses appear in employment agreements, consumer contracts, software terms, vendor deals, construction contracts, and confidentiality agreements. They often surface only after a dispute arises, when one side moves to compel arbitration instead of litigating in court.
Practical Example
A service agreement says any dispute arising out of the contract must be resolved through binding arbitration administered by a named organization. When payment problems arise, one side files in court and the other asks the court to enforce the arbitration clause.
How It Differs From Nearby Terms
- An arbitration clause determines where and how a dispute is resolved; it does not define the parties’ main business obligations.
- A breach of contract is the alleged wrong that may trigger the dispute.
- Indemnification allocates responsibility for certain losses, not the forum for deciding the issue.
Related Terms
Knowledge Check
- Does an arbitration clause usually decide the merits of the dispute itself? No. It usually decides the forum and procedure for resolving the dispute.
- Why is the clause important before any lawsuit is filed? Because it may determine where the parties must go once a dispute begins.