Arbitration Agreement

An Arbitration Agreement in the United States is a legally binding contract governed by the Federal Arbitration Act (FAA), 9 U.S.C. Sections 1-16, in which the parties agree to resolve disputes through private arbitration rather than litigation in federal or state court. The FAA, enacted in 1925, establishes a strong federal policy favoring the enforceability of arbitration agreements, as the Supreme Court affirmed in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983), declaring that questions of arbitrability should be resolved in favor of arbitration.

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 decision called an award. Unlike mediation, which produces advisory recommendations, arbitration produces a final, binding outcome enforceable as a court judgment under FAA Section 9. Arbitration awards are subject to extremely limited judicial review under FAA Section 10, which permits vacatur only on four narrow grounds: corruption, fraud, or undue means in procuring the award; evident partiality or corruption of an arbitrator; arbitrator misconduct, including refusal to hear material evidence; or the arbitrator exceeding the scope of authority granted by the agreement.

The enforceability of arbitration agreements has been extensively litigated before the Supreme Court. AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) held that the FAA preempts state laws that discriminate against arbitration, including California's Discover Bank rule that had prohibited class action waivers in consumer arbitration clauses. Epic Systems Corp. v. Lewis, 584 U.S. 497 (2018) held that arbitration agreements requiring individualized arbitration proceedings and waiving class or collective action claims are enforceable under the FAA, even for claims under the Fair Labor Standards Act (FLSA) and the National Labor Relations Act (NLRA). However, arbitration agreements must satisfy basic contract formation requirements under applicable state law, including mutual assent, consideration, and the absence of procedural or substantive unconscionability.

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (EFAA), codified at 9 U.S.C. 401-402, carved out a significant exception by prohibiting the enforcement of pre-dispute arbitration agreements for claims of sexual assault or sexual harassment, giving claimants the unilateral option to litigate such claims in court. Additional federal limitations exist for certain types of disputes, including claims under the Dodd-Frank Act's whistleblower provisions and certain military service member protections.

An Arbitration Agreement in the United States is needed when two businesses entering a commercial contract want to include a dispute resolution mechanism that avoids the expense, delay, and unpredictability of public litigation in federal or state court. Commercial arbitration under the American Arbitration Association (AAA) Commercial Rules or JAMS Complete Arbitration Rules typically resolves disputes within 12 to 18 months, compared to 2 to 5 years for federal court litigation and 3 to 7 years in congested state courts such as New York Supreme Court or Los Angeles Superior Court.

Employers across all 50 states require employees to agree to arbitrate workplace disputes — including discrimination claims under Title VII of the Civil Rights Act of 1964, harassment claims, wrongful termination claims, and wage disputes under the Fair Labor Standards Act (FLSA) — as a condition of employment. The Supreme Court's decision in Epic Systems Corp. v. Lewis, 584 U.S. 497 (2018) confirmed the enforceability of mandatory employment arbitration clauses with class action waivers, though the EFAA now prohibits pre-dispute arbitration of sexual assault and sexual harassment claims.

Consumer-facing companies including technology platforms, financial services firms, telecommunications providers, and e-commerce retailers include arbitration clauses in their terms of service or customer agreements to manage class action exposure. The Supreme Court's Concepcion decision validated this practice, and companies such as Amazon, Google, AT&T, and Bank of America maintain arbitration provisions in their consumer agreements.

Parties to international business transactions agree to arbitrate disputes under institutional rules such as the International Chamber of Commerce (ICC) Arbitration Rules, the International Centre for Dispute Resolution (ICDR) Rules, or the London Court of International Arbitration (LCIA) Rules. International arbitration avoids the home-court advantage problem and produces awards enforceable in over 170 countries under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958).

Business partners in joint ventures, partnerships, or LLC operating agreements include arbitration clauses to resolve internal governance disputes — such as deadlock, fiduciary duty claims, or capital call disputes — confidentially, without public court filings that could damage the business's reputation.

Construction industry participants include arbitration provisions in their contracts under the AAA Construction Industry Arbitration Rules, allowing disputes over payment, change orders, defects, and delay damages to be resolved by arbitrators with specialized construction industry expertise rather than generalist judges.

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

An Arbitration Agreement for the United States must include several critical provisions to be enforceable under the Federal Arbitration Act and to function effectively as a dispute resolution mechanism.

The scope clause must define which disputes are subject to arbitration. Broad clauses — covering "any dispute arising out of or relating to this agreement" — are generally enforceable and capture contract claims, tort claims, statutory claims, and equitable claims. Narrow clauses may limit arbitration to specific types of disputes, such as payment disputes or intellectual property claims, while reserving other claims for litigation. The forms-legal.com Arbitration Agreement template allows parties to select between broad and narrow scope clauses, with guidance on the legal implications of each approach.

The selection of the arbitral forum and applicable rules is a critical drafting decision. Parties in the United States typically designate the American Arbitration Association (AAA), JAMS, or the International Centre for Dispute Resolution (ICDR) as the administering organization. Each institution maintains distinct procedural rules: the AAA's Commercial Arbitration Rules govern business-to-business disputes, the AAA's Consumer Arbitration Rules apply to consumer transactions, and the AAA's Employment Arbitration Rules govern workplace disputes. JAMS Complete Arbitration Rules and JAMS Simplified Arbitration Rules provide alternative procedural frameworks. The agreement should specify which set of rules governs the proceeding.

The arbitrator selection process must address the number of arbitrators — a single arbitrator for disputes under $1 million (consistent with AAA's default rule under Commercial Rule R-16) or a panel of three arbitrators for larger or more complex disputes. Required qualifications, such as expertise in the relevant industry or area of law, should be specified. Most institutional rules provide for a list-and-strike method where each institution provides a list of qualified arbitrators and each party strikes unacceptable candidates and ranks the remainder.

Class action waivers, which prohibit arbitration on a class or collective basis, are enforceable under the FAA following AT&T Mobility v. Concepcion and Epic Systems v. Lewis. The agreement should explicitly state whether class arbitration is permitted or waived. Consolidation provisions should address whether multiple related arbitrations can be combined into a single proceeding.

The seat of arbitration determines the procedural law governing the arbitration and the court with jurisdiction to confirm, vacate, or modify the award under FAA Sections 9-11. Popular seats include New York (Southern District), Delaware (Court of Chancery), California (Central District), and Texas (Northern District). For international arbitration, the seat determines which national arbitration law governs procedural matters.

Discovery limitations should be defined, as reduced discovery is one of arbitration's primary advantages over litigation. The agreement may restrict document requests to relevant and non-privileged materials, limit depositions to a specified number, and prohibit interrogatories. The AAA Commercial Rules provide for the exchange of information at the arbitrator's discretion under Rule R-22.

Confidentiality provisions should specify whether the proceedings, evidence, briefs, and award are confidential. Unlike court proceedings, which are generally public, arbitration is private by default but not automatically confidential absent an agreement. The agreement should impose mutual confidentiality obligations with defined exceptions for legal and regulatory compliance.

The allocation of arbitration costs — including the arbitrator's fees, administrative fees, and each party's attorney's fees — must be addressed. For consumer and employment arbitration, courts may invalidate cost-splitting provisions that impose excessive costs on the weaker party under the unconscionability doctrine established in Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000).