Term
Arbitration
Resolving a dispute outside the state courts before an arbitrator or arbitral tribunal agreed by the parties. It is usually faster and private, and the award is enforceable like a judgment, but the scope for appeal is limited.
Updated
What it means
Arbitration is the resolution of a dispute outside the state courts by an arbitrator or arbitral tribunal agreed by the parties, usually through an arbitration clause in the contract. The arbitrator issues an award that is binding and enforceable like a court judgment.
Its advantages are usually speed, privacy and the ability to choose an arbitrator with specialist knowledge, for example in construction or finance. In international disputes, thanks to the New York Convention, an arbitral award is enforceable in a large number of countries, often more easily than a state court judgment.
The drawback is limited scope for appeal. An award can be challenged only on statutory grounds, such as serious procedural defects, not because a party dislikes the decision on the merits. For smaller disputes, arbitrators' fees can exceed court fees.
How it works in practice
The arbitration clause should specify which permanent arbitral institution or method of appointing arbitrators applies, the seat and language of the proceedings, the number of arbitrators and the rules. A vague or contradictory clause leads to disputes over jurisdiction itself, which drags out the whole process.
Between businesses, arbitration is common especially in international contracts. With consumers, strict protective limits apply, and an arbitration clause in a consumer contract must meet special conditions.
Before arbitrating, it is worth considering mediation or other forms of alternative dispute resolution, which are cheaper and preserve the business relationship. Some contracts contain tiered clauses: negotiation first, then mediation, and only then arbitration.
What to watch out for
An arbitral award is an enforcement title, but if the clause is invalid or the proceedings had serious defects, the losing party may resist enforcement. A well-drafted clause and a reputable institution reduce the risk of later complications.
Private proceedings do not automatically mean the parties must keep things confidential. If confidentiality matters, it must be agreed expressly. Moreover, certain types of dispute, such as some property disputes or employment claims, cannot be arbitrated.
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