What Is Arbitration? - Rules & Definition

Instructor: Shawn Grimsley
As court litigation grows more expensive and drawn out, many businesses are opting to arbitrate disputes instead of seeking relief in court. In this lesson, we will learn what arbitration is and about general rules applicable to all arbitration proceedings. After the lesson, you will be given an opportunity to reinforce your knowledge with a brief quiz.

Why Is Arbitration Important?

Managers need to understand the concepts, rules and procedures of arbitration because it is a growing form of alternative dispute resolution that is used to resolve disputes instead of a lawsuit before a court. In fact, many business agreements have mandatory arbitration clauses that require that disputes be settled by arbitration. Arbitration is sometimes desirable because disputes can be resolved quicker than in traditional court litigation and at lesser expense.


Arbitration is a method of alternative dispute resolution where disputes are settled privately by a decision-maker called an arbitrator in a process similar to litigation in court. You should note that there is no judge or jury in arbitration.

Arbitration Distinguished from Mediation

It's important that you don't confuse arbitration and mediation. Arbitration is different from mediation, another form of alternative dispute resolution, because an arbitrator makes a decision deciding the dispute while a mediator attempts to facilitate a settlement among the disputing parties. A mediator has no power to force a settlement.

Federal Law

The Federal Arbitration Act protects arbitration agreements by making them enforceable, giving courts very limited power to set aside an arbitration decision. Both state and federal courts are subject to it.

Arbitration Agreements

Arbitrations are governed by arbitration agreements entered into by both parties. Typical arbitration provisions include:

  • Binding arbitration versus non-binding arbitration: Binding arbitration means that you are stuck with the arbitrator's decision, with some very few exceptions provided by law. Non-binding arbitration means you are not bound by the arbitrator's decision.
  • Selection of arbitrator: An arbitration agreement will outline the manner in which you and the other party will select the arbitrator. While not necessary, an arbitrator is often a subject-matter expert in the matter being arbitrated.
  • Timescale: The agreement will often tell you how long the parties have to complete each step of the arbitration process.
  • Applicable law: While arbitration does not involve a judge, the arbitration will still generally apply the law to the dispute. A good arbitration agreement will tell the arbitrator which laws apply. Relevant laws can include state laws, federal law and even international laws.
  • Designation of particular rules of arbitration: Parties often select the relevant industry-specific rules created by the American Arbitration Association. However, the parties are typically free to develop their own rules by agreement or vary the standard rules provided by the American Arbitration Association or similar organization.

The Arbitration Process

The arbitration process and procedure is often very similar to court litigation. While legal representation is not required, most parties choose to be represented by a lawyer. Typical steps include:

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