Skip to content

Pros and Cons of Arbitration Clauses in Your Contract

When entering a contract, most parties focus on the terms governing their new relationship. However, parties commonly neglect to consider how they will resolve any disputes that arise during the course of the contract. Whilst you may never have to rely on such provisions, dispute resolution clauses are key to ensuring that you are protected if anything does go wrong. You should consider what type of dispute resolution will be most beneficial for both parties, and draft your contract accordingly. This article will examine the pros and cons of including an arbitration clause in your commercial contract.

 

What is Arbitration?

 

Arbitration is a form of alternative dispute resolution. It is a process by which parties who have entered into a dispute meet with an independent arbitrator to present their own sides of the dispute. After a hearing, the arbitrator makes a binding and enforceable determination. 

 

Knowing the difference between the various types of alternative dispute resolution is important. It is important that yu understand the difference between the key alternative dispute resolution processes, arbitration and mediation. 

 

What Does an Arbitration Clause Contain?

 

An arbitration clause will generally outline:

  • what rules the arbitration will be bound by, such as English law;
  • the seat (location) of the arbitration;
  • the language used during the arbitration proceedings;
  • the number of arbitrators that there will be; and 
  • how the costs of the arbitration will be shared. 

If the arbitration is to be carried out in Australia, the Australian Centre for International Commercial Arbitration governs the rules of the arbitration. 

Front page of publication
Complete Guide to Expanding Your Startup to Australia

After proving your startup’s success in your home country, you may be thinking about the next step for growth — expanding overseas.

This free guide aims to introduce startup founders to the Australian startup market.

Download Now
Continue reading this article below the form
Loading form

Pros of Arbitration Clause

Efficiency 

Litigation can be a lengthy process that may require many years to resolve. Arbitration, on the other hand, is a shorter and more efficient process. Some proceedings are finished in a single day. The ability to appeal a decision is often limited, so parties enter arbitration knowing that the process will be short. 

Confidentiality 

Court proceedings are commonly open to the public. This means that trade secrets and other commercially sensitive material may be disclosed during the course of proceedings.

In contrast, arbitration is highly confidential and the arbitrators and parties are bound by strict confidentiality rules. This can benefit businesses that do not wish for the details of their dispute to become public. 

 

Binding Decision 

Other forms of alternative dispute resolution, such as mediation, do not produce decisions that are binding and enforceable. However, an arbitrator’s decision, in the form of an award, is binding on both parties. If a party does not act upon it, they can be taken to court as a court will ordinarily uphold the decision of an arbitrator. 

 

Expertise

Arbitrators often have expertise in specific areas, which can be helpful for parties wanting to ensure the decision-maker understands their relevant industry. For example, an arbitrator may be an expert in the construction industry or the medical industry. 

 

International Parties

When parties enter a contract across jurisdictions, an arbitration clause is extremely beneficial. Under the New York Convention, an award made through arbitration is enforceable in more than 150 countries. This means that parties from different countries do not need to worry about issues like jurisdiction and enforceability, which may arise if a traditional court judgement is sought. 

 

Flexibility and Informality

Although an arbitration award is enforceable, the process of arbitration may be more flexible than traditional litigation. The rules are typically less onerous in arbitration proceedings compared to the rules of evidence in litigation. 

 

Cons of Arbitration Clause

Cost 

Although it is much more efficient than litigation, the costs of arbitration can sometimes be high. The reason for this is that there are various fees involved, including initiation fees and arbitrators fees. Furthermore, parties often retain legal representation during arbitration which can be quite costly. This is something parties should be aware of before initiating the process. 

 

Formality 

While the arbitration process is more flexible than litigation, it is still subject to its own set of rules and processes. For example, in mediation, the parties may exercise significant control over the mediation process. In arbitration, there are binding rules and processes that must be followed once the process commences. 

 

Key Takeaways

When drafting a contract, it is essential that parties turn their minds to dispute resolution clauses. There are various options available, with factors such as budget, jurisdiction and a party’s risk aversion playing a part in what type of dispute resolution works for you. You should consider various pros and cons when deciding if you will incorporate an arbitration clause in a commercial agreement.

 

If you need help negotiating or drafting a contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

 

Frequently Asked Questions

Is arbitration binding?

If you are a party to a contract with an arbitration clause, in practice, either party may obligate the other party to attend. The decision of the arbitrator is also usually binding.

Is arbitration expensive?

Though not without cost, arbitration is almost always cheaper than court litigation.

Register for our free webinars

ACCC Merger Reforms: Key Takeaways for Executives and Legal Counsel

Online
Understand how the ACCC’s merger reforms impact your legal strategy. Register for our free webinar.
Register Now

Ask an Employment Lawyer: Contracts, Performance and Navigating Dismissals

Online
Ask an employment lawyer your contract, performance and dismissal questions in our free webinar. Register today.
Register Now

Stop Chasing Unpaid Invoices: Payment Terms That Actually Work

Online
Stop chasing late payments with stronger terms and protections. Register for our free webinar.
Register Now

Managing Psychosocial Risks: Employer and Legal Counsel Responsibilities

Online
Protect your business by managing workplace psychosocial risks. Register for our free webinar.
Register Now
See more webinars >
Ushna Bashir

Ushna Bashir

Senior Lawyer | View profile

With a deep understanding of commercial and regulatory landscapes, Ushna provides guidance to businesses across diverse industries. She drafts and negotiates a wide range of contracts, including in IT, ecommerce and professional services. She also has expertise in assisting businesses with managing their privacy and data obligations in compliance with Australian privacy laws.

Qualifications: Bachelor of Laws, Bachelor of Arts, Graduate Diploma of Legal Practice, University of Technology Sydney.

Read all articles by Ushna

About LegalVision

LegalVision is an innovative commercial law firm that provides businesses with affordable, unlimited and ongoing legal assistance through our membership. We operate in Australia, the United Kingdom and New Zealand.

Learn more

We’re an award-winning law firm

  • Award

    2025 Future of Legal Services Innovation Finalist - Legal Innovation Awards

  • Award

    2025 Employer of Choice - Australasian Lawyer

  • Award

    2024 Law Company of the Year Finalist - The Lawyer Awards

  • Award

    2024 Law Firm of the Year Finalist - Modern Law Private Client Awards

  • Award

    2022 Law Firm of the Year - Australasian Law Awards