An arbitration clause is a clause in a contract that requires the parties to resolve their disputes through an
arbitration process. Although such a clause may or may not specify that arbitration occur within a specific
jurisdiction
Jurisdiction (from Latin 'law' + 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, areas of jurisdiction apply to local, state, and federal levels.
J ...
, it always binds the parties to a type of resolution outside the courts, and is therefore considered a kind of
forum selection clause
A forum selection clause (sometimes called a dispute resolution clause, choice of court clause, jurisdiction clause or an arbitration clause, depending upon its form) in a contract with a conflict of laws element allows the parties to agree tha ...
.
Arbitration clauses are frequently paired with
class action waivers which prevents contracting parties to file
class action lawsuits
A class action, also known as a class-action lawsuit, class suit, or representative action, is a type of lawsuit where one of the parties is a group of people who are represented collectively by a member or members of that group. The class action ...
against each other. In the United States, arbitration clauses also include a provision which requires parties to waive their rights to a
jury trial
A jury trial, or trial by jury, is a legal proceeding in which a jury makes a decision or findings of fact. It is distinguished from a bench trial in which a judge or panel of judges makes all decisions.
Jury trials are used in a significan ...
. All three provisions have attained significant amounts of support and controversy, with proponents arguing that arbitration is equally as fair as courts and a more informal, speedier way to resolve disputes, while opponents of arbitration condemning the clauses for limited appeal options and allowing large corporations to effectively silence claims through "private justice".
Use and enforceability
Canada
All provinces except for
Quebec
Quebec ( ; )According to the Canadian government, ''Québec'' (with the acute accent) is the official name in Canadian French and ''Quebec'' (without the accent) is the province's official name in Canadian English is one of the thirtee ...
have adopted an arbitration code similar to the
United Nations Commission on International Trade Law's Model Law. Quebec has opted instead to require that arbitrations would be subject to the province's own
Civil Code, including Quebec's Code of Civil Procedure. Arbitration in Canada is primarily administered by the
ADR Institute of Canada The ADR Institute of Canada (ADRIC), is a non-profit organization that offers alternative dispute resolution services to its members and the public across the country. It is one of the leading authorities on ADR in Canada, offering highly respected ...
and the British Columbia International Commercial Arbitration Centre.
Class action waivers lack a uniform policy across Canada, as the
Supreme Court of Canada has found that provincial legislation governed disputes, though in ''Seidel v. TELUS Communications'', the court found that because a class action waiver was attached to an invalid arbitration agreement, the class action waiver was void. The province of
Ontario
Ontario ( ; ) is one of the thirteen provinces and territories of Canada.Ontario is located in the geographic eastern half of Canada, but it has historically and politically been considered to be part of Central Canada. Located in Central C ...
, per the Consumer Protection Act of 2002, has banned class action waivers. A court of appeals in
British Columbia
British Columbia (commonly abbreviated as BC) is the westernmost province of Canada, situated between the Pacific Ocean and the Rocky Mountains. It has a diverse geography, with rugged landscapes that include rocky coastlines, sandy beaches, ...
also found that class action waivers were unenforceable and unconscionable in ''Pearce v. 4 Pillars Consulting Group'' due to the contract in question being a
standard form contract written by 4 Pillars and giving little bargaining power to Pearce.
Mainland China
China allows arbitration clauses to exist, though the
Supreme People's Court
The Supreme People's Court of the People's Republic of China (SPC; ) is the highest court of the People's Republic of China. It hears appeals of cases from the high people's courts and is the trial court for cases about matters of nation ...
has found that an arbitration clause that does not specify an "arbitral commission" is invalid and unenforceable.
France
French law generally supports arbitration, though declares that capacity, marriage and divorce cannot be arbitrated.
Germany
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, and if the signed document does not bear any other content than the arbitration agreement.
United Kingdom
In the U.K. it is not possible for parties to a contract to prevent courts from exercising their jurisdiction over contact disputes, but through what is known as a ''Scott v. Avery'' clause they may require that a dispute be adjudicated by an arbitrator before submitting the matter to a court.
United States
The
federal government has expressed a policy in support of arbitration clauses, because they reduce the burden on court systems to resolve disputes. This support is found in the
Federal Arbitration Act
The United States Arbitration Act (, codified at ), more commonly referred to as the Federal Arbitration Act or FAA, is an act of Congress that provides for judicial facilitation of private dispute resolution through arbitration. It applies in ...
, which permits compulsory and binding arbitration, under which parties give up the right to appeal an arbitrator's decision to a court.
In 2022, the U.S. Congress passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFASASHA), which excludes these types of complaints from arbitration clauses, including retroactively. Congress also included a ban on class action waivers for claims covered under the act.
Fairness
The use of the clause has been criticized for its unfairness. In the US in 2020, workers who challenged their employers through forced arbitration won their cases just 1.6 percent of the time. This prompted members of the United States'
Democratic Party Democratic Party most often refers to:
*Democratic Party (United States)
Democratic Party and similar terms may also refer to:
Active parties Africa
*Botswana Democratic Party
*Democratic Party of Equatorial Guinea
*Gabonese Democratic Party
*Demo ...
to present bills limiting the scope of arbitration clauses, most notably the
Forced Arbitration Injustice Repeal Act
The Forced Arbitration Injustice Repeal (FAIR) Act of 2022 is proposed legislation in the US Congress. The comprehensive legislation would prohibit pre-dispute, forced arbitration agreements from being valid or enforceable if it requires forced ...
(which has yet to pass) and the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, which was signed into law in 2022 by president
Joe Biden.
Contractual language
A number of
international arbitration bodies provide sample arbitration clauses for parties to use. Examples of these are:
* The
Chartered Institute of Arbitrators
The Chartered Institute of Arbitrators (abbreviated as CIArb) is a professional organisation representing the interests of alternative dispute resolution (ADR) practitioners. Founded on 1 March 1915, it was granted a royal charter by Queen Eliza ...
:
Any dispute or difference arising out of or in connection with this contract shall be determined by the appointment of a single arbitrator to be agreed between the parties, or failing agreement within fourteen days, after either party has given to the other a written request to concur in the appointment of an arbitrator, by an arbitrator to be appointed by the President or a Vice President of the Chartered Institute of Arbitrators.
* The
London Court of International Arbitrationbr>
Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause. The number of arbitrators shall be ne/three The seat, or legal place, of arbitration shall be nsert city or country The language to be used in the arbitral proceedings shall be nsert language The governing law of the contract shall be the substantive law of nsert governing law
* The
International Court of Arbitration
ICC International Court of Arbitration is an institution for the resolution of international commercial disputes. It operates under the auspices of the International Chamber of Commerce and consists of more than 100 arbitrators from roughly 90 co ...
br>
All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce
The International Chamber of Commerce (ICC; French: ''Chambre de commerce internationale'') is the largest, most representative business organization in the world. Its over 45 million members in over 100 countries have interests spanning every sec ...
by one or more arbitrators appointed in accordance with the said Rules.
* The
American Arbitration Association:
Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial r otherArbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
In keeping with the informality of the arbitration process, the law in England and Wales 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"
* "suitable arbitration clause"
* "arbitration, if any, by ICC Rules in London"
Courts in England and Wales 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"
* "internationally accepted principles of law governing contractual relations"
[''Deutsche Schachtbau v R'As al-Khaimah National Oil Co'' 9901 AC 295]
See also
* ''
Epic Systems Corp. v. Lewis
''Epic Systems Corp. v. Lewis'', 584 U.S. ___ (2018), was a case decided by the Supreme Court of the United States on how two federal laws, the National Labor Relations Act (NLRA) and the Federal Arbitration Act (FAA), relate to whether emplo ...
'', a
United States Supreme Court
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...
case that considers whether arbitration clauses are legal under the
National Labor Relations Act
*
Class action waiver
Footnotes
External links
The Arbitration Database
Further reading
*
Gary Born. ''International Arbitration and Forum Selection Agreements: Planning, Drafting and Enforcing'' book (2010)
{{Authority control
Contract law
Arbitration
Business law
Contract clauses