Contract Glossary
Arbitration
Definition
Arbitration is private court. Instead of a judge and jury, a neutral arbitrator hears both sides and makes a binding decision. It's usually faster and cheaper than a lawsuit — but you give up your right to appeal.
In Practice
Your freelance contract with a tech company includes a mandatory arbitration clause. When they refuse to pay your final $12,000 invoice, you can't sue them in court. Instead, you file with the American Arbitration Association (AAA), pay the filing fee (around $200–$300 for claims under $75,000), and an arbitrator decides the case — usually within 3–6 months, compared to 1–2 years in court. Arbitration clauses typically specify the administering body (AAA, JAMS, or ICC for international disputes), the location, and whether the proceedings are confidential. Some clauses limit discovery, which can be an advantage or disadvantage depending on which side you're on. A well-drafted clause also addresses who pays the arbitrator's fees — splitting costs or having the losing party pay.
Example Clause
Any dispute, controversy, or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by binding arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules. The arbitration shall take place in [City, State], and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
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Frequently asked questions about arbitration
You can try to negotiate it out before signing. But if you've already signed a contract with an arbitration clause, you're generally bound by it. Some consumer and employment arbitration clauses have been struck down by courts as unconscionable — but for most business contracts, they hold up.
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Create your contractThis content is for informational purposes only and does not constitute legal advice. For contracts with significant financial or legal implications, review by a qualified attorney is recommended.