What is an arbitration agreement?

 

An arbitration agreement is an agreement between two parties in dispute to begin the arbitration procedure.

Often the dispute which results in arbitration will have its roots in an alleged breach of contract, where that contract had an arbitration clause included in it.

What are the terms of an arbitration agreement?

Most commonly, the arbitration agreement will simply restate the terms originally agreed upon by the parties in the arbitration clause.

For example, the questions of:

  • How many arbitrators will be chosen
  • Who will choose the arbitrators
  • How an expert will be appointed

The clause can in other words be seen as a general agreement for all disputes which may arise from a contract, whilst an arbitration contract is an agreement regarding a specific dispute.

An arbitration contract may differ from the terms previously agreed upon in an arbitration clause. For example:

  • If the clause states that three arbitrators will be appointed for a dispute, but both parties consider one arbitrator to be sufficient for the matter at hand, the parties will agree in the arbitration contract to only have one arbitrator, which is most likely to be jointly appointed

An arbitration agreement may be particularly useful if your business gets involved in an international deal with a foreign business. Here is an international sale of goods example to illustrate the use of an arbitration agreement.

How arbitration agreements work in practice

You agree to sell parts that your company manufactures to another company (X) based in China.

For one reason or another, the parts you send X are not fit for their common purpose. X may be able to sue you for breach of contract in China. You could incur huge losses as a result of this as you have to defend your case in a foreign jurisdiction, but you could avoid this by having an arbitration agreement with X.

In an arbitration agreement both parties agree to resolve their dispute by arbitration. So, in the example above, X would not be able to sue you in the Chinese courts as they would be contractually bound by the arbitration agreement.

Furthermore, say you did have an arbitration agreement in place with X but they still decided to seek redress through the Chinese courts. If this did happen, you may be entitled to counter sue X for contractual damages for breach of the arbitration agreement.

If they did want to take action against you, they would have to go through the arbitration process. So having an arbitration agreement in place could save your company a huge amount of time, expense and stress.

What is it that arbitrators will actually do then?

Do you need legal interpretation of your arbitration agreement? Contact Law can put you in touch with a specialist arbitrator who can help you resolve any disputes you may have. Please call us on 0800 1777 162 or complete the web-form above.

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