An arbitration clause requires that disputes arising under the contract be resolved through arbitration - a private, binding dispute-resolution process - rather than through court litigation. It defines where a disagreement is heard, not who wins it.
How arbitration works in contracts
When a signed contract carries an arbitration clause and the parties later disagree, neither side can head straight into a public court. The clause redirects the dispute into a private forum run by one or three arbitrators the parties choose or accept from a rostered institution. The arbitrators hear evidence, apply the governing law and issue an award that is binding under the New York Convention in more than 170 jurisdictions.
Worked example: a supplier and buyer dispute a EUR 400,000 volume rebate. Their contract has an ICC arbitration clause seated in London under English law. Instead of years in court, the parties file with the ICC and receive a binding award in around ten months.
Where arbitration clauses appear in contracts
Arbitration clauses sit near the end of most cross-border commercial contracts: supply agreements, distribution agreements, licensing deals, joint venture terms and framework agreements. The clause specifies the arbitration institution, the seat, the language of proceedings, the number of arbitrators and the governing law. It works alongside a separate jurisdiction clause and a formal dispute resolution process that governs escalation before arbitration begins.
Arbitration clause FAQ
Is arbitration always cheaper than litigation?
No. Arbitration saves time and keeps proceedings private, but arbitrator fees and institutional charges can push a small-value dispute above the cost of court. The economics favour arbitration on larger, cross-border matters.
Can an arbitration clause be enforced if one party refuses to arbitrate?
Yes. Courts in New York Convention states will stay their own proceedings and refer the parties to arbitration when a valid clause exists.
Where should the arbitration seat sit?
In a jurisdiction with a supportive arbitration law and reliable courts of enforcement. London, Paris, Singapore and Stockholm are common choices for European contracts.
