A private dispute resolution process where parties present their case to an arbitrator instead of going to court.
Arbitration is an alternative dispute resolution method where disputes are decided by a neutral third-party arbitrator (or panel) instead of a judge or jury in a public court. Most commercial contracts include arbitration clauses that require the parties to use arbitration rather than filing a lawsuit. The decision is usually binding and very difficult to appeal.
Arbitration has advantages over litigation: it's typically faster, more private, and can be less expensive for straightforward disputes. The parties choose the arbitrator (unlike a judge who is randomly assigned), which allows for industry expertise. Services like JAMS and the American Arbitration Association (AAA) administer commercial arbitration.
The downsides: arbitration can still be expensive for small disputes, class arbitration waivers in consumer contracts have faced legal challenges, and the limited grounds for appeal mean that a bad arbitration decision is very hard to undo. Whether to include an arbitration clause in your contracts is a real decision — one worth thinking through with your attorney rather than just accepting as a default. For small business service agreements, a well-drafted arbitration clause can provide a faster, cheaper path to resolution than court.