Arbitration, a form of ADR , is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons by whose decision (the award) they agree to be bound Explain.

An arbitration clause is a commonly used clause in a contract[1] that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside of the courts, and is therefore considered a kind of forum selection clause[2].

Arbitration, a form of ADR[3], is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons (the “arbitrators”, “arbiters” or “arbitral tribunal“), by whose decision (the “award“) they agree to be bound. It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides. Other forms of ADR include mediation (a form of settlement negotiation facilitated by a neutral third party) and non-binding resolution by experts. Arbitration is often used for the resolution of commercial disputes, particularly in the context of international commercial transactions. The use of arbitration is also frequently employed in consumer and

Employment matters, where arbitration may be mandated by the terms of employment or commercial contracts. Arbitration can be either voluntary or mandatory (although mandatory arbitration can only come from a statute or from a contract that is voluntarily entered into, where the parties agree to hold all disputes to arbitration, without knowing, specifically, what disputes will ever occur) and can be either binding or non-binding[4]. Non-binding arbitration is, on the surface, similar to mediation. However, the principal distinction is that whereas a mediator will try to help the parties find a middle ground on which to compromise, the (non-binding) arbitrator remains totally removed from the settlement process and will only give a determination of liability and, if appropriate, an indication of the quantum of damages payable.

 Advantages and drawbacks of Arbitration Clause-

The following are said to be advantages[5] of arbitration over court litigation:

A. Speedier resolution; Arbitration can be fast, quick and easy. However, there can be exceptions due to multiple parties, arbitrators, lawyers and litigation strategy and lawsuits can drag on for years and years. Since the rules of evidence and procedure are usually relaxed in arbitration proceedings, the parties are also in a better position to represent themselves without having to get lawyers involved.

 B. Less costly;. Naturally follows that arbitration also tends to be less expensive than pursuing a lawsuit. While the parties will usually end up having to pay the arbitrator, his or her fees will inevitably be less than the attorneys’ fees that they may have to pay to take the same case to trial. however, there can be exceptions due to multiple parties, lawyers, arbitrators and litigation strategy

 C. Exclusionary rules of evidence don’t apply; everything can come into evidence so long as relevant and non-cumulative.

D.Not a public hearing: There are no public records of the proceedings. Confidentiality is required of the arbitrator and by agreement the whole dispute and the resolution of it can be subject to confidentiality imposed on the parties, their experts and attorneys by so providing in the arbitration agreement.[6]

E. From defense point of view, there is less exposure to corrective damages and run away juries;

G. The ability to get arbitrators who have arbitrator process expertise and

H. Limited discovery because it is controlled by what the parties have agreed upon and it is all controlled by the arbitrator. Arbitrators typically try to be practical and oftentimes look at compromise as being inherently fair. Thus, the likelihood is that an arbitrator’s decision will award something to at least one of the parties. However, you would not expect that damages would be awarded that were anywhere near what a jury might have awarded if (and that is a big if) the matter were to have been tried before a jury

I. Often, the arbitration process is less adversarial than litigation which helps to maintain business relationships between the parties.

J. The arbitration is more informal than litigation. So that it serves a bridge to the gap in an adversarial proceeding and the parties can get a better glimpse of where things are headed if they are unable to resolve their differences.

K. The finality of the arbitration award and the fact that normally there is no right of appeal to the courts to change the award.

 The following have often been said to constitute the disadvantages or drawbacks of arbitration:

A. There is no right of appeal even if the arbitrator makes a mistake of fact or law. However, there are some limitations on that rule, the exact limitations are difficult to define, except in general terms, and are fact driven.

B. There is no right of discovery unless the arbitration agreement so provides or the parties stipulate to allow discovery or the arbitrator permits discovery.

C. Identifying other drawbacks will typically depend upon which side of the fence you are on. For example, if a party were concerned about a large jury decision in the event a dispute ever arose, that party would negotiate for an arbitration clause so as to keep things out of court if a dispute happens to arise. For example, in view of the potential for a large jury judgment on a wrongful termination case, this might explain why an employer would want an arbitration clause in an employment contract. Given the potential for a large jury award on a malpractice action, this would also help to explain why a medical provider would want a patient to sign an arbitration clause.

D. Unknown bias and competency of the arbitrator unless the arbitration agreement set up the qualifications or the organization that administers the arbitration, has pre-qualified the arbitrator.

E. There is no jury and from the claimant’s point of view that may be a serious drawback.

F. An arbitrator may make an award based upon broad principles of “justice” and “equity” and not necessarily on rules of law or evidence.

G. An arbitration award cannot be the basis of a claim for malicious prosecution.

H. Except in certain circumstances, non-signatories of the arbitration agreement cannot be compelled to arbitrate.

I. There are no guarantees that arbitration will be a fair process. As noted, once a decision is rendered in a binding arbitration, the parties are generally stuck with that decision. Without the right to appeal, there is always the risk of being subject to the whims and prejudices of the arbitrator. Overall, this is probably the biggest drawback to the arbitration process.

 Essentials of arbitration clause:

Some of the major and common conditions worked under arbitration clause are given below which helped to understand the arbitration procedure.[7]

1. An arbitration agreement, to be valid and binding, must be in writing. Such an agreement must satisfy all the essential elements of a valid contract.
2. Consensus: The parties must reach conscious agreement, with a genuine concurrent intention.
3. Contractual capacity: The parties must be legally capable of concluding a binding contract.
4. Legality: The contract must be legal and may not contradict any statutory or common law rule.
5. Physical possibility: The performance must be determinable and possible at time of conclusion.
6. Formalities: The contract must abide by any formalities set by law or by the parties themselves
7. Signatures of the parties are not necessary but it must be shown that they agreed to the statement of disputes by arbitration. It is not necessary that the agreement should be contained in a formal document. The record of such an agreement in a clause in the contract or in a letter or memorandum is enough.
8. It is not necessary that the name of the person who will act as the arbitrator should be mentioned in the agreement.
9. The construction of an arbitration agreement is not to be dissatisfied by narrow sophistic interpretation.

These essentials can vary on the circumstances. Whatever the conditions are both the parties need to follow these conditions.

Furthermore, arbitration clauses are often combined with geographic forum selection clauses, and choice-of-law clauses[8], both of which are also fully enforceable. The result is that a plaintiff may find himself or herself compelled to arbitrate in a strange private forum thousands of miles from home, and the arbitrators may decide the case on the basis of the law of a state or a nation which the plaintiff has never visited.

An arbitration clause may nevertheless be challenged and held invalid if it designates a biased party as the arbitrator[9].for example the Supreme Court of California found that an arbitration clause in a contract of adhesion which necessarily puts disputes before a body that would tend to be biased towards the defendant, is unduly oppressive, and therefore void as unconscionable. For this reason, many arbitration clauses designate widely recognized neutral organizations such as the American Arbitration Association.

Some legal orders exclude or restrict the possibility of arbitration for reasons of the protection of weaker members of the public, e.g. consumers. E.g., German law excludes disputes over the rental of living space from any form of arbitration, while arbitration agreements with consumers are only considered valid if they are signed, and if the signed document does not bear any other content than the arbitration agreement. The restriction does not apply to notarized agreements, as it is presumed that the notary public will have well informed the consumer about the content and its implications.

A business contract, lease or other written contract may contain an arbitration clause. By using such a clause, the parties to the contract agree to arbitrate any future disputes. As with any clause, all parties must agree to it’s use in the contract before the contract is signed. The following arbitration clause language may be modified to suit the needs of the parties or used  “as is” in order to utilize the services of an affiliated United States Arbitration & Mediation office, if arbitration is ever needed.

A contract arbitration clause is a method of “alternative dispute resolution” whereby the parties to the contract agree that their dispute will be resolved by arbitration rather than through the court system. Simply put, arbitration is an informal hearing before a neutral third party, often a retired judge or lawyer, where the arbitrator hears each side’s evidence and decides the outcome of the dispute. The parties have to obey the law of contract in an arbitration clause.

The law of contract:

The law of contract[10] is the body of legal rules governing the conclusion and consequences of contracts. It defines the basis and requirements of contractual liability, as well as the rights and duties of the parties. Moreover, it regulates the breach of contract and provides remedies for such breach. Finally, it governs the termination of contractual obligations.

These rules, along with the law of delict and law of enrichment, fall under the law of obligations, which is a category of the law of patrimony, forming part of private law, which is fundamentally concerned with defining, protecting and balancing legitimate individual interests. However, the classification of the law of contract into private law is necessarily qualified by the increasing degree to which private law and public law have come to overlap.

As indicated above, the South African law of contract finds its origin in Roman-Dutch law but it has also been influenced to some extent by English law (e.g. in respect of the rules of quasi-consensus). ok now that law of contract is the body of legal rules governing the conclusion and consequences of contracts.

Exhausting the arbitration procedure there should be some penalties for parties. To commencing arbitration, due to a “loyalty clause” in their contract.26 The tribunal held that the arbitrators should not evaluate the parties’ conduct in respect of their confidential negotiations and incidentally observed that, since there was a dispute as to whether the requirements of the loyalty clause were fulfilled, the claimant would at any rate be entitled to have the question of its applicability decided by the arbitrators.[11]

 Defective contracts:

Some of the reasons for defecting the contract in a arbitration clause are given below-

Void contract: One of the requirements for a valid contract is absent – no contract is concluded.

Voidable contract: A contract is indeed concluded but it can be set aside on account of a defect that existed at the time of conclusion (e.g. consensus improperly obtained).

Unenforceable contract: A contract is indeed concluded but it creates only a natural obligation, which is recognized but not enforced by law (e.g. a wager).

 Conclusion:

Arbitration means the settlement of a dispute by referring the dispute to a third party and abiding by his decision. Arbitration is less costly than a suit in a court of law. It is also more expeditious. Therefore, commercial contracts frequently contain a clause providing for a reference to arbitration in case a dispute breaks out concerning any matter relating to the contract. The policy of the legislature in India has always been to encourage settlement of disputes by arbitration. By their nature, the subject matter of some disputes is not capable of arbitration. Exhausting arbitration procedure embedded in the contract shouldn’t acceptable. If it happened by any circumstances the penalties should obeyed by all the parties who agreed with law of contract in the arbitration clause.

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