Definition
Arbitration is a form of alternative dispute resolution in which the parties submit their dispute to one or more neutral arbitrators, who hear the evidence and issue a decision—called an award—that is usually final and binding. Instead of going to court before a judge or jury, the parties resolve their conflict privately. Most arbitration arises from an arbitration clause in a contract, and the resulting award can typically be enforced in court like a judgment.
Legal Meaning
Arbitration is a private alternative to litigation. The parties agree—either in advance through a contract clause or after a dispute arises—to have a neutral third party decide the matter rather than a court. The arbitrator functions much like a private judge: reviewing evidence, hearing arguments, and rendering a decision. In binding arbitration, that decision is final, and the parties give up their right to a trial and to most appeals.
Arbitration clauses are extremely common in business and commercial contracts, as well as in employment and consumer agreements. They typically name the rules that will govern (for example, the rules of a recognized arbitration organization), specify how arbitrators are chosen, and set the location and scope of arbitration. By signing such a contract, a party generally agrees to resolve covered disputes through arbitration instead of in court.
The legal force of arbitration agreements comes largely from the Federal Arbitration Act (FAA), a federal statute that makes written arbitration agreements in contracts involving interstate commerce valid and enforceable. The FAA embodies a strong national policy favoring arbitration, and courts generally must compel arbitration when a valid agreement covers the dispute. Many states have their own arbitration statutes that operate alongside the FAA. The result is that arbitration agreements are usually enforced, though they remain subject to ordinary contract defenses such as fraud or unconscionability.
Key Points
- Arbitration is private dispute resolution decided by a neutral arbitrator
- Binding arbitration produces a final award with very limited appeal rights
- Arbitration clauses in contracts require parties to arbitrate future disputes
- The Federal Arbitration Act makes most written arbitration agreements enforceable
- Arbitration is often faster and more private than going to court
- An arbitration award can usually be confirmed and enforced as a court judgment
- Courts can refuse arbitration only on limited grounds like fraud or unconscionability
- Arbitration differs from mediation, which is non-binding facilitation
Real-World Example
A small manufacturer and a parts supplier sign a contract that includes an arbitration clause requiring any dispute to be resolved by binding arbitration under a named set of commercial rules. Two years later, the manufacturer claims the supplier shipped defective parts and wants to sue in court.
Because of the arbitration clause, the supplier asks the court to compel arbitration, and under the Federal Arbitration Act the court will generally enforce the clause and send the dispute to an arbitrator. The arbitrator hears both sides, reviews the evidence, and issues an award. If the manufacturer prevails, it can take the award to court to have it confirmed and enforced like a judgment. Neither party can simply relitigate the merits in court afterward.
Arbitration vs. Litigation vs. Mediation
| Feature | Arbitration | Litigation (Court) | Mediation |
|---|---|---|---|
| Decision-maker | Neutral arbitrator(s) | Judge or jury | Parties themselves |
| Binding? | Usually binding | Binding | Non-binding unless settled |
| Privacy | Private | Public record | Private |
| Appeal rights | Very limited | Broad | Not applicable |
| Speed/cost | Often faster, varies | Often slower, costly | Usually fastest, cheapest |
| Formality | Less formal than court | Most formal | Informal |
Advantages and Drawbacks of Arbitration
Arbitration is often praised for being faster, more private, and more flexible than court litigation. The parties can choose an arbitrator with industry expertise, schedule proceedings around their needs, and avoid a public record. For businesses, finality can be valuable: there is little risk of a years-long appeal.
But the same features can cut the other way. Because appeal rights are so narrow, an arbitrator's error of fact or law usually cannot be corrected. Discovery may be more limited than in court, which can disadvantage a party that needs evidence held by the other side. Critics also note that mandatory arbitration clauses in consumer and employment contracts can require individuals to give up the right to a jury trial and, in some cases, the ability to bring class claims. Whether arbitration is favorable depends heavily on the specific clause and the parties' positions.
Enforcing and Challenging an Award
After an arbitrator issues an award, the winning party can ask a court to "confirm" it, turning it into an enforceable judgment. The losing party has only narrow grounds to "vacate" (cancel) the award—such as fraud, corruption or evident partiality of the arbitrator, misconduct that prejudiced a party, or the arbitrator exceeding the scope of their authority. Courts will not overturn an award merely because they disagree with the result. This deference is what gives arbitration its finality.
Related Terms
Facing an Arbitration Clause or Dispute?
A business or litigation attorney can explain your rights under an arbitration agreement and represent you in the process.
Explore Business LawWhen You Need a Lawyer
Arbitration may be less formal than court, but the stakes and the procedures are real. You should consult an attorney if:
- You are asked to sign a contract that contains a mandatory arbitration clause
- A dispute has arisen and the other side is trying to compel arbitration
- You need to prepare for or present a case at an arbitration hearing
- You want to confirm an award in your favor or challenge one against you
- You believe an arbitration clause is unconscionable or was procured by fraud
An attorney can evaluate whether the clause is enforceable, develop your evidence, and advocate for you before the arbitrator. To understand the costs involved, see our guide on understanding legal fees.
Frequently Asked Questions
Is arbitration binding?
Most arbitration is binding, meaning the arbitrator's decision (called an award) is final and can be enforced in court like a judgment. The parties give up their right to a trial and have only very limited grounds to appeal. Non-binding arbitration also exists, where the decision is only advisory, but binding arbitration is far more common in contracts.
What is an arbitration clause?
An arbitration clause is a provision in a contract requiring the parties to resolve future disputes through arbitration instead of going to court. These clauses are common in employment, consumer, and commercial agreements. By signing the contract, the parties agree in advance to arbitrate, and courts will usually enforce that agreement.
What is the Federal Arbitration Act?
The Federal Arbitration Act (FAA) is a federal law that makes written arbitration agreements valid and enforceable in contracts involving interstate commerce. It reflects a strong national policy favoring arbitration, and courts generally must enforce arbitration agreements and the resulting awards unless a recognized ground to refuse exists.
How is arbitration different from mediation?
In arbitration, a neutral arbitrator hears evidence and issues a decision that is usually binding. In mediation, a neutral mediator helps the parties negotiate their own settlement but cannot impose a decision, so mediation is non-binding unless the parties reach and sign an agreement. Arbitration resembles a private trial, while mediation is a facilitated negotiation.
Can an arbitration award be appealed?
Only on very narrow grounds. Unlike a court judgment, an arbitration award generally cannot be overturned simply because the arbitrator got the facts or law wrong. A court may vacate an award only for limited reasons such as fraud, evident partiality or corruption of the arbitrator, or the arbitrator exceeding their authority. This finality is a defining feature of arbitration.