Contract Glossary
Arbitration Clause
Definition
A specific contract provision that requires disputes to be resolved through arbitration rather than litigation. While 'arbitration' is the process, the 'arbitration clause' is the contractual mechanism that locks both parties into it — often before any dispute even exists. Once you sign a contract with an arbitration clause, you've typically waived your right to sue in court.
In Practice
You sign a software licensing agreement with a mandatory arbitration clause specifying AAA (American Arbitration Association) rules, with arbitration in New York. Two years later, the software fails catastrophically and costs you $500,000. You want to sue in your home state — but the arbitration clause forces you to arbitrate in New York under AAA rules. The clause also says the arbitrator's decision is 'final and binding,' meaning no appeal. Arbitration clauses are in nearly every SaaS agreement, employment contract, and consumer terms of service. The details matter: who picks the arbitrator, who pays the fees, where the arbitration happens, and whether class arbitration is allowed.
Example Clause
Any dispute, controversy, or claim arising out of or relating to this Agreement, or the breach, termination, or validity thereof, shall be finally settled by binding arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules. The arbitration shall be conducted by a single arbitrator in [City, State]. The arbitrator's award shall be final and binding and may be entered as a judgment in any court of competent jurisdiction. Each Party shall bear its own costs of arbitration, and the Parties shall share equally the fees of the arbitrator.
Common in these contract types
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Frequently asked questions about arbitration clause
It's a provision that requires both parties to resolve disputes through arbitration — a private process with a neutral decision-maker — instead of going to court. Most arbitration clauses are 'mandatory' and 'binding,' meaning you must arbitrate and the decision is final. They're standard in business contracts, employment agreements, and consumer terms of service.
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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.