Arbitration Clause and Submission Agreement: Understanding Its Importance

An arbitration clause and submission agreement is a legal contract between two parties that outlines how disputes will be resolved in the event of a disagreement. This agreement typically requires both parties to submit to arbitration, a process in which an impartial third party is appointed to hear evidence and make a decision on the dispute.

Why is an arbitration clause and submission agreement important?

1. Cost-effective

Arbitration is typically less expensive and faster than taking a dispute to court. Legal fees and expenses can add up quickly when navigating the court system, whereas arbitration can often be resolved more quickly with less expense.

2. Confidentiality

Arbitration proceedings are typically confidential, which means that the details of the dispute will not be publicly disclosed. This can be particularly important if the dispute involves sensitive business information or trade secrets.

3. Specialized knowledge

In arbitration, parties can select an arbitrator who has specialized knowledge in the subject matter of the dispute. This can be particularly important in disputes involving complex technical or industry-specific issues.

4. Finality of decision

In arbitration, the decision of the arbitrator is typically final and binding. This means that neither party has the right to appeal the decision, which can provide finality and closure to the dispute.

How to draft an effective arbitration clause and submission agreement?

1. Clearly define the scope of the agreement

The agreement should clearly define which disputes are subject to arbitration. For example, the agreement might specify that only disputes related to a particular contract or transaction are subject to arbitration.

2. Appointment of arbitrator

The agreement should specify how the arbitrator will be appointed. Will both parties choose an arbitrator? Will a third party be responsible for appointing an arbitrator?

3. Rules governing the arbitration

The agreement should specify which arbitration rules will be used to govern the arbitration process. The American Arbitration Association (AAA) and the International Chamber of Commerce (ICC) are two commonly used organizations that provide arbitration rules.

4. Place of arbitration

The agreement should specify where the arbitration will take place. This can be important if the parties are located in different states or countries.

In conclusion, an arbitration clause and submission agreement can be an effective way to resolve disputes without the time and expense of going to court. When drafting an agreement, it is important to clearly define the scope of the agreement, the appointment of the arbitrator, the rules governing the arbitration, and the place of arbitration.