Arbitration agreements are often referred to as “midnight clauses.” They are typically the least reviewed clauses, sometimes signed without much attention, and may come as a surprise years later. Parties might not realize they agreed to arbitration or even understand what arbitration is, leading them to question whether the agreement is binding at all.
Arbitration agreements come in two general forms: arbitration clauses within a contract or standalone agreements. Most commonly, they are included in the dispute resolution clauses of a business transaction.
Are arbitration agreements legally binding? The short answer is a resounding yes. Once signed, an arbitration agreement is legally binding. It obligates parties to resolve disputes arising from the business transaction through arbitration. Furthermore, it prevents parties from resolving their dispute before a national judge. If a party attempts to resort to national courts, the courts should redirect the parties back to arbitration.
Essentially, arbitration agreements are like any other contracts. However, they must meet certain basic requirements for their formation. Some of these elements relate to the fundamental components of an arbitration agreement, while others concern the capacity to enter into agreements.
Regarding capacity, parties entering an arbitration agreement must have the authority to do so. This may seem overly legalistic, but some business representatives might act beyond their powers. This extends to elements of validity, such as the existence of free will, absence of duress, and related aspects.
The primary element is that parties agree to resolve their current and future disputes through arbitration, whether these disputes relate wholly or partly to their business relationship.
The agreement doesn’t necessarily need to be in writing, but there must be evidence that the parties agreed to arbitration. Without this evidence, there is no agreement. This underscores the necessary condition of the agreement’s existence and the flexibility in its form.
While a written agreement isn’t mandatory, evidence of the agreement is crucial. The agreement can be made through electronic means, not limited to traditional paper or fax, but also including more informal communication methods like WhatsApp.
Other noteworthy aspects of arbitration agreements include determining the seat of arbitration, selecting an institution to administer the arbitration, deciding the number of arbitrators, and choosing the language of the arbitration.
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