ⓘ Arbitration clause

                                     

ⓘ Arbitration clause

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, it always binds the parties to a type of resolution outside the courts, and is therefore considered a kind of forum selection clause. It is also known as the "Scott v Avery Clause".

                                     

1. Enforceability

In the United States, the federal government has expressed a policy of support of arbitration clauses, because they reduce the burden on court systems to resolve disputes. This support is found in the Federal Arbitration Act, which permits compulsory and binding arbitration, under which parties give up the right to appeal an arbitrators decision to a court. In Prima Paint Corp. v. Flood & Conklin Mfg. Co., the U.S. Supreme Court established the "separability principle", under which enforceability of a contract must be challenged in arbitration before any court action, unless the arbitration clause itself has been challenged.

Some jurisdictions exclude or restrict the possibility of arbitration for reasons of the protection of weaker members of the public, e.g. consumers. For example, 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.

                                     

2. Use

Mandatory arbitration clauses are widespread but not universal in the United States. For example, they are used by Amazon.com, 15 of the largest 20 U.S. credit card issuers, and 7 of the 8 largest cell phone companies, and 2 out of 3 major bike sharing companies in Seattle.

                                     

3. Contractual language

The American Arbitration Association provides the following template for an arbitration clause:

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 Arbitration Rules, and judgment on the award rendered by the arbitrators 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"
  • "arbitration, if any, by ICC Rules in London"
  • "suitable arbitration clause"

The courts have also upheld clauses which specify resolution of disputes other than in accordance with a specific legal system. These include provision indicating:

  • "internationally accepted principles of law governing contractual relations"
  • 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"


                                     

4. Sample clauses

A number of international arbitration bodies provide sample arbitration clauses for parties to use. Examples of these are:

  • The Chartered Institute of Arbitrators
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 Arbitration: