Arbitration in Contracts
Today, interactions in society are frequently structured through various contracts in economic, political, social, and other fields. In general, contracts obligate parties to comply with specific terms, to perform certain acts, or to refrain from certain acts. At times, a contractual obligor may intentionally or unintentionally fail to perform its obligations, thereby giving rise to a dispute. Such disputes may be resolved through different mechanisms. One common approach is to refer the matter to the appropriate judicial authority and to file a lawsuit. However, due to the high costs of litigation and the large volume of cases before the courts, this route often requires a lengthy period.
Arbitration Proceedings and Issuance of an Award
Conditions for Referring Contractual Disputes to Arbitration
For the reasons noted above, parties sometimes choose an alternative dispute resolution method due to time loss, protracted proceedings, and the high costs of litigation and expert assessments. This method, known as arbitration, is widely used in developed jurisdictions.
Arbitration means entrusting the resolution of a dispute and the decision-making process to an impartial person to determine which party is entitled and which is not. That impartial person is the arbitrator, who may be a natural person or a legal entity. In practice, parties may select an arbitrator and expressly provide for that selection in the contract, or they may designate an institution or company as the arbitrator.
Advantages of Referring Disputes to Arbitration
Key advantages of arbitration in contracts include the following:
- Compared to court litigation, arbitration is generally less costly.
- There is no strict requirement to follow administrative formalities and civil procedure rules in the same manner as court proceedings.
- Communication and engagement between the parties and the arbitrator or arbitral tribunal is often more effective.
- Arbitration helps prevent unnecessary delay and may enable arbitrators to address the dispute more efficiently.
Which Disputes Can Be Referred to Contractual Arbitration?
Certain disputes cannot be referred to arbitration. These exceptions are stated in Article 478 of the Civil Procedure Code. For example, disputes relating to bankruptcy, marriage and annulment of marriage, divorce, and lineage are not arbitrable. Criminal matters are also outside the scope of arbitration and must be handled by courts.
A key issue in any referral to arbitration is selecting arbitrators with sufficient knowledge of the applicable arbitration rules and requirements. Otherwise, arbitration may become even longer and more expensive than court proceedings. Accordingly, it is recommended that disputes be referred to experienced legal professionals or to institutional arbitration centers, and that parties avoid appointing individuals who lack adequate familiarity with arbitration regulations.
Voluntary and Mandatory Arbitration
Arbitration may be either voluntary or mandatory. Arbitration in contracts is generally voluntary. In voluntary arbitration, parties may, at the time of entering into the contract, include a clause stating that any potential disputes will be referred to arbitration for resolution. Arbitration may also be agreed in a separate arbitration agreement.
In either case, it is essential to specify matters such as the scope of disputes to be submitted to arbitration, the identity and details of the arbitrator or arbitrators to avoid ambiguity, and the number of arbitrators when more than one is intended.
In some situations, the parties may, through an arbitration agreement or a separate contract, appoint a person to select the arbitrator on their behalf. That person may be a natural person or a legal entity. The third party responsible for appointing the arbitrator must comply with all conditions set out by the parties in the arbitration agreement.
Who Cannot Be Appointed as an Arbitrator?
The following persons may be appointed as arbitrators only if both parties expressly agree:
- Individuals under the age of twenty-five.
- Persons who have an interest in the dispute.
- Persons who have a relationship by blood or marriage with one of the parties.
- Persons who, or whose spouses, are heirs of one of the parties.
- Persons who serve as guarantor, guardian, attorney, or agent managing the affairs of one of the parties.
- Government employees within the scope of their official duties.
The individuals listed above are not eligible for appointment as arbitrators unless both parties consent.
Frequently Asked Questions About Arbitration in Contracts
Arbitration is a method for resolving contractual disputes in which the parties refer the dispute to an impartial arbitrator or arbitral tribunal to determine the rightful party. Its advantages commonly include lower cost, reduced delay, and improved engagement with the decision-maker.
Certain matters, including bankruptcy, marriage and annulment of marriage, divorce, lineage, and criminal matters, are not arbitrable and must be addressed by courts.
Voluntary arbitration is agreed upon by the parties, typically in the contract or in a separate arbitration agreement, to resolve disputes through arbitration. Mandatory arbitration is imposed by law for specific matters. In contractual practice, arbitration is usually voluntary.
Individuals under twenty-five, persons with an interest in the dispute, close relatives by blood or marriage, certain heirs, agents or attorneys managing a party’s affairs, and relevant government employees cannot serve as arbitrators unless both parties consent.
It is advisable to select experienced arbitrators with a solid understanding of arbitration rules. Parties may also choose institutional arbitration centers to reduce the risk of delay and high cost.
Yes. The parties may appoint a third party, whether an individual or an entity, to resolve the dispute, and they may also authorize a third party to appoint the arbitrator, provided that the appointment follows the arbitration agreement. What is arbitration in contracts, and what are its advantages?
Which disputes cannot be referred to arbitration?
What is the difference between voluntary and mandatory arbitration?
Who cannot be selected as an arbitrator?
How should an appropriate arbitrator be selected for a contract?
Can arbitrators or appointing authorities be third-party individuals or entities?
Can an arbitration clause be added after the contract has already been signed?
Yes. If both parties agree, they can amend the contract or enter into a separate arbitration agreement after signing. Any changes should be clearly documented in writing to avoid future disputes.
What happens if the contract says disputes go to arbitration but doesn’t name an arbitration center?
That does not always make the clause invalid, but it can create uncertainty. Depending on the wording of the agreement and the applicable law, the parties or a court may need to determine how the arbitration should proceed. A carefully drafted clause can help avoid these issues.
Can one party refuse arbitration after signing the contract?
In many cases, a valid arbitration agreement is binding on the parties. Whether someone can avoid arbitration depends on the wording of the clause, the applicable law, and any issues affecting its enforceability.
Is arbitration always less expensive than going to court?
Not always. Arbitration can be faster and more efficient in many disputes, but costs vary depending on factors such as the complexity of the case, the number of arbitrators, and the arbitration institution involved. The most suitable option depends on the circumstances.
Can an arbitration clause apply to only part of a contract instead of every dispute?
Yes. Parties can agree that only certain categories of disputes will be resolved through arbitration while others remain subject to the courts. The scope of the clause depends on how it is drafted.
If the contract is terminated, does the arbitration clause disappear too?
Not necessarily. In many situations, an arbitration clause continues to apply to disputes arising out of the contract, even after the contract itself has ended. The exact effect depends on the governing law and the wording of the agreement.
Can small business contracts benefit from arbitration too, or is it mainly for large companies?
Arbitration can be used in both small and large commercial agreements. Whether it is the right choice depends on the value of the contract, the nature of the business relationship, and the parties’ preferences for resolving disputes.
What if one party files a lawsuit even though the contract requires arbitration?
Depending on the applicable law, the other party may ask the court to enforce the arbitration agreement and refer the dispute to arbitration. Whether that request will be granted depends on the validity and scope of the arbitration clause.
Can the parties choose the language of the arbitration in the contract?
Yes. One advantage of arbitration is that the parties often have flexibility to agree on procedural matters such as the language, location, and rules governing the proceedings. Addressing those issues in advance can help avoid unnecessary disagreements later.
What’s the biggest mistake people make when writing an arbitration clause?
A common mistake is using vague or incomplete language. Failing to specify important details, such as the scope of disputes, the arbitration rules, or the seat of arbitration, can create unnecessary complications if a dispute arises. If you are preparing a commercial contract, it is worth having the arbitration clause reviewed before signing.