Arbitration clause

What it means

An arbitration clause is a contract term sending disputes to an arbitrator or arbitral institution instead of the ordinary courts. The award is binding and enforceable.

The upside is speed and an arbitrator who knows the field; the downside is that appeal is all but impossible. An award can be challenged only on narrow grounds.

Arbitration differs from mediation in that the arbitrator decides the dispute even against the will of one party, whereas a mediator only helps the parties reach agreement. The clause must be in writing and is subject to stricter rules in consumer contracts, so it is used mainly in contracts between businesses.

How it works in practice

In commercial contracts it fits technical projects where assessing the work is complex and a court would need an expert and a year. The arbitrator is usually a specialist.

For simple money claims a payment order is cheaper and just as fast. So the clause is not inserted by default but chosen for the likely type of dispute.

In contracts with a partner outside the EU the clause is often a practical necessity: an arbitral award is easier to enforce in many countries than a Slovak court judgment, because its recognition is governed by an international convention. Such a contract also fixes the language, the seat and the governing law, so these are not argued over only at the enforcement stage.

What to watch out for

A clause favouring an arbitral body connected to the other side is a risk. Check who appoints the arbitrators and where proceedings take place before signing, not once a dispute exists.

A loosely drafted clause, for example naming an arbitral institution that does not exist or has closed, first leads to a dispute over who should hear the case at all. Months go on the question of jurisdiction, and arbitration fees, which are paid up front, can exceed the claim itself when the amount is small.