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What is Contract Arbitration?

By Christy Bieber
Updated May 16, 2024
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Contract arbitration is a legal process in which a disagreement resulting from a contract is resolved. Contract arbitration is a form of adjudication of the legal issues and questions that arise in a contract dispute. In most cases, arbitration related to a contract is legally binding.

When two parties write and sign a legal contract, both parties are bound to honor the terms of that contract. If one party fails to honor the terms of the contract, it is considered a breach. A person or entity who breaches a subject can be made to pay monetary damages if the breach injured the other party financially.

Many modern contracts create arbitration clauses to deal with breaches or with other contract disputes. An arbitration clause is a contract clause that mandates that disputes will be resolved by arbitration. In other words, when and if the two parties in the contract have a problem, the problem will be resolved by an arbitrator instead of by a judge.

Arbitration can be structured in a number of ways. Most commonly, an arbitrator or a panel of arbitrators will listen to evidence and arguments from both sides regarding the dispute. The arbitrator will then come to a decision on which party is correct.

The arbitrator, or panel, thus acts similarly to the way a judge in a courtroom would act. Arbitration, however, does not always have to be structured as a trial would be structured. Most contracts which contain arbitration clauses stipulate the process by which the contract arbitration will be carried out.

When a contract contains an arbitration clause, that clause is binding in the vast majority of cases. This means that if the contract contains an arbitration clause, the parties will be required by the courts to work out their problems in arbitration instead of in a court room. The only time an arbitration clause is not upheld is if the terms of the arbitration are grossly unfair and/or if the contract is a "contract of adhesion" or a take-it-or-leave-it contract in which one party essentially had no choice but to sign.

If contract arbitration occurs, it too is normally binding. This means that once a person is bound to resolve a dispute through contract arbitration, they are also legally bound to comply with whatever decision the arbitrator makes. The arbitrator's decision will be enforced by the courts.

It is possible to appeal an arbitrator's decision in most cases by filing a motion with the appellate court. The appellate court, however, is deferential to the arbitrator's decision, and will not overturn the case unless the arbitrator acted unfairly or the arbitrator's decision could not possibly be valid. Thus, in effect, the appeal is only a check on the process of contract arbitration and is not a chance to have a case heard in court.

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