Arbitration clauses can be found in a variety of contracts these days, including securities trading and employment contracts, as well as numerous sorts of consumer agreements, such as credit cards, house repairs, health insurance, telephones, and auto sales and financing. Arbitration is required by an arbitration clause. The American Arbitration Association estimates it handles more than 2 million arbitrations each year, with hundreds of thousands more handled through other organizations and individuals.

Despite the growing use of arbitration and the fact that most consumers are bound by a number of arbitration agreements, many people do not know what arbitration is or how it works.

Here’s a general explanation of important arbitration terms, types of arbitrators, and how the process generally works

Arbitration is a procedure for resolving issues outside of court. A neutral arbitrator examines the evidence, hears from the parties, and then renders a decision in the case. The arbitration process has fewer formalities than a courtroom hearing or trial (and frequently lower prices), but it is more structured than mediation or negotiation.

Most arbitrations happen as a result of an arbitration clause in a contract, which specifies that any disputes relating to the agreement should be resolved by arbitration. It’s important to comprehend what an arbitration clause may cover before getting into what arbitration is. Arbitration clauses can be straightforward; they simply state that claims will be settled under applicable arbitration laws and then enforced in court.

Arbitration clauses can also be more complicated. They may control the selection of arbitrators, the location of the hearing, who will pay for attorneys’ fees, and whether the final award must be kept confidential. Arbitration provisions can be mandatory or voluntary, and the decision of the arbitrator is binding or nonbinding.

A dispute may be subject to either mandatory or voluntary arbitration, depending on the wording of the agreement. Mandatory arbitration is required for any case that is referred to it. Not all disputes are eligible for forced arbitration. The Ending Forced Arbitration of Sexual Assault Harassment Act, passed in March 2022, makes pre-dispute binding arbitration agreements in employment contracts unenforceable and invalid for sexual assault and sexual harassment claims.

Parties can choose to go to arbitration through a voluntary agreement. Most consumer advocates believe that this is the preferred, evenhanded approach to arbitration, allowing it to be a choice rather than a requirement.

In binding arbitration, the arbitrator’s decision is final. It may not be reviewed or reversed in any court except in very limited cases, such as fraud or misuse of power.

In nonbinding arbitration, either party has the option of rejecting the decision and demanding a trial rather than accepting it. Nonbinding decisions are frequently regarded as an independent evaluation of a possible lawsuit’s strengths and weaknesses with the aim of encouraging a settlement.