An Arbitration Agreement is a legally binding contract in which the parties agree to resolve disputes through private arbitration rather than litigation in court. Governed by the Federal Arbitration Act (FAA), 9 U.S.C. Sections 1-16, arbitration agreements are enforceable in federal and state courts and preempt contrary state laws under the Supremacy Clause. The FAA establishes a strong federal policy favoring arbitration, as the Supreme Court affirmed in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983).

Arbitration is a form of alternative dispute resolution (ADR) where a neutral third party (the arbitrator) hears evidence and arguments from both sides and renders a binding decision called an award. Unlike mediation, which is advisory, arbitration produces a final, enforceable outcome. Arbitration awards are subject to very limited judicial review under FAA Section 10, which permits vacatur only for corruption, fraud, evident partiality, arbitrator misconduct, or the arbitrator exceeding their powers.

The enforceability of arbitration agreements has been extensively litigated. In AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Supreme Court held that the FAA preempts state laws that discriminate against arbitration, including rules that prohibit class action waivers in arbitration clauses. However, arbitration agreements must still satisfy basic contract formation requirements including mutual assent, consideration, and the absence of unconscionability. Courts may refuse to enforce agreements found to be procedurally or substantively unconscionable under state contract law.

Two businesses entering a commercial contract want to include a dispute resolution mechanism that avoids the expense, delay, and unpredictability of public litigation. An employer requires employees to agree to arbitrate workplace disputes, including discrimination, harassment, and wrongful termination claims, as a condition of employment.

A consumer-facing company includes an arbitration clause in its terms of service or customer agreements to manage the risk and cost of class action lawsuits. Parties to an international business transaction agree to arbitrate disputes under institutional rules (such as the International Chamber of Commerce or the American Arbitration Association) to avoid navigating unfamiliar foreign court systems.

Business partners in a joint venture, partnership, or LLC operating agreement include an arbitration clause to resolve internal governance disputes confidentially without public court filings. Construction project participants include arbitration provisions in their contracts to resolve payment disputes, change order disagreements, and defect claims through a process where the arbitrator has industry expertise.

Parties to an existing dispute who have no prior arbitration agreement voluntarily enter into a submission agreement to arbitrate the specific controversy rather than proceed with pending or anticipated litigation.

The scope clause must define which disputes are subject to arbitration. Broad clauses cover any dispute arising out of or relating to the agreement, while narrow clauses may be limited to specific types of claims. The agreement should specify whether it covers tort claims, statutory claims, and equitable relief in addition to contract disputes.

The selection of the arbitral forum and rules is critical. Parties typically designate an administering organization such as the American Arbitration Association (AAA), JAMS, or the International Centre for Dispute Resolution (ICDR), along with the applicable procedural rules. The agreement may specify whether the AAA's Commercial Rules, Consumer Rules, or Employment Rules govern the proceedings.

The arbitrator selection process must be addressed, including the number of arbitrators (one or three), required qualifications, and the selection procedure. Many institutional rules provide for a list-and-strike method or mutual agreement. The agreement should specify whether the arbitrator must have specific expertise in the subject matter.

The agreement must address class action waivers, consolidation of claims, and whether the arbitrator has authority to award punitive damages, attorney's fees, or injunctive relief. The location (seat) of arbitration should be specified, as it determines the procedural law governing the arbitration and the court with jurisdiction to confirm or vacate the award.

Discovery limitations should be defined, as reduced discovery is one of arbitration's primary advantages. The agreement may specify the permissible scope of document requests, depositions, and interrogatories. Confidentiality provisions should address whether the proceedings, evidence, and award are confidential. The allocation of arbitration costs, including the arbitrator's fees and administrative expenses, must be addressed to ensure the agreement is not unconscionable.