Arbitration Clause
A contract provision requiring parties to resolve disputes through a private arbitrator rather than the public court system.
While straightforward in theory, many businesses fail to actively track obligations tied to this concept - often resulting in missed deadlines, unintended renewals, penalties, or loss of contractual rights.
US Law · For business owners and foundersWhat is a Arbitration Clause?
An arbitration clause is a provision in a contract requiring the parties to resolve any disputes through private arbitration instead of the courts. Both sides present their case to a neutral arbitrator or panel, whose decision is typically final and binding.
The Federal Arbitration Act (FAA), passed in 1925, governs arbitration agreements across the US and reflects a strong national policy in favor of enforcing them. Courts almost always uphold properly drafted arbitration clauses.
Arbitration clauses appear in virtually every type of business contract: SaaS terms, employment agreements, commercial leases, vendor contracts, franchise agreements, and investment documents. Most people sign them without reading them.
In practice, many teams rely on a contract expiry tracking system to stay on top of dates and obligations tied to clauses like this.
Key Elements
Scope
Defines which disputes are covered. "Any and all claims" is the broadest version. Some clauses carve out IP disputes or injunctive relief.Administering Body and Rules
AAA, JAMS, or ad-hoc. Each has its own filing fees, procedural rules, and timelines. AAA Commercial Rules are most common in B2B contracts.Number of Arbitrators
Typically one arbitrator for smaller disputes. A three-person panel is standard for claims above a threshold, often $1M+.Seat and Venue
Where the arbitration physically takes place. This can heavily favor the larger party if they choose a distant city.Binding vs. Non-Binding
Binding means the award is final and enforceable. Non-binding means either party can reject the decision and still take the dispute to court.Class Action Waiver
Often bundled with arbitration clauses - prevents parties from joining class action lawsuits. Upheld by the Supreme Court in Epic Systems Corp. v. Lewis (2018).Real-World Example
You sign a $200,000 software development contract. The software arrives late and full of bugs. You withhold final payment. The agency threatens to sue - but the contract requires AAA arbitration in the agency's home city of Phoenix.
Instead of your local court, you are forced to travel to Phoenix, pay AAA filing fees ($2,000-$5,000+), and argue before a private arbitrator. You cannot join forces with other affected clients. The arbitrator's decision is final. You cannot appeal it just because you disagree with the outcome.
This is why many businesses adopt automated deadline tracking to ensure no critical dates are missed before they pass.
Sample Clause Language
Example Clause (AAA Commercial Rules)Watch Out For
One-sided venue
If the clause requires arbitration in the other party's city, you face travel costs and logistical disadvantages. Push for a neutral city or remote proceedings.High filing fees
AAA and JAMS filing fees can run from $1,750 to $10,000+. For small claims, arbitration may actually cost more than small claims court.No appeal rights
Courts overturn arbitration awards only in narrow circumstances: corruption, fraud, or clear jurisdictional overreach. You cannot appeal just because the decision went against you.Limited discovery
Arbitration allows far less document discovery than litigation. If your case depends on obtaining records from the other side, this is a serious disadvantage.EFAA of 2022
The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act invalidates pre-dispute arbitration clauses for those specific claims.Don't let arbitration clause deadlines catch you off guard
Key dates tied to arbitration clauses - renewal windows, expiry cutoffs, notice periods - can easily slip through the cracks when tracked manually. Missing them triggers automatic extensions, penalties, or lost rights. ExpiryEdge tracks every critical deadline and sends automated reminders before they're due - so nothing slips.
Instead of relying on spreadsheets or manual follow-ups, a centralized renewal reminder system ensures every deadline is visible, tracked, and actioned automatically.
How to Use This in Your Favor
Include a class action waiver
If you sell to many consumers or have many employees, this can protect you from costly class-action litigation. The Supreme Court has upheld class action waivers paired with arbitration clauses.Choose your home city as the venue
Specify your city as the seat to make it inconvenient and costly for the other party to pursue small claims against you.Carve out injunctive relief
Add language allowing either party to seek emergency injunctive relief in court without waiving the right to arbitrate. This protects you if a former employee is about to share trade secrets.Add a confidentiality obligation
Require all proceedings and the award to remain confidential. This protects your business reputation and sensitive information from becoming public record.Define cost allocation
Draft the clause so the losing party pays all arbitration costs. This deters frivolous claims while keeping your path to enforcement open.Related Terms
Frequently Asked Questions
Is an arbitration clause enforceable in the US?
Yes. The Federal Arbitration Act makes arbitration clauses broadly enforceable across the US. Courts honor them unless the clause is unconscionable, was signed under duress, or covers a claim specifically exempted by statute - such as sexual harassment claims under the EFAA of 2022.
Can I negotiate out of an arbitration clause?
In B2B contracts, yes. You can request removal or modifications such as changing the venue, removing the class action waiver, or adding appeal rights. In consumer and employment contracts they are less negotiable, but always worth raising - many counterparties will agree if asked politely.
What is the difference between binding and non-binding arbitration?
Binding arbitration means the arbitrator's decision is final and enforceable by a court - you cannot appeal it except in very narrow circumstances. Non-binding arbitration is advisory: either party can reject the award and proceed to full litigation.
Does an arbitration clause waive my right to a jury trial?
Yes. By agreeing to arbitrate, you give up your Seventh Amendment right to a jury. Your dispute is decided by one or more private arbitrators instead.
How much does arbitration cost compared to litigation?
For disputes under $75,000, arbitration can be more expensive than litigation because of filing fees. For large complex commercial disputes, arbitration is often faster and cheaper than multi-year court proceedings. The key variable is the size and complexity of your claim.