FUNCTION AND PURPOSE

When parties agree to arbitrate their disputes, they give up the right to have those disputes decided by a national court. Instead, they agree that their disputes will be resolved privately, outside any court system. The arbitration agreement thus constitutes the relinquishment of an important right – to have the dispute resolved judicially – and creates other rights. The rights it creates are the rights to establish the process for resolving the dispute. In their arbitration agreement, the parties can select the rules that will govern the procedure, the location of the arbitration, the language of the arbitration, the law governing the arbitration, and frequently, the decision makers, whom the parties may choose because of their particular expertise in the subject matter of the parties’ dispute. The parties’ arbitration agreement gives the arbitrators the power to decide the dispute and defines the scope of that power. In essence, the parties create their own private system of justice.

Arbitration Clauses and Submission Agreements

The parties’ arbitration agreement is frequently contained in a clause or clauses that are embedded in the parties’ commercial contract. The agreement to arbitrate is thus entered into before any dispute has arisen, and is intended to provide a method of resolution in the event that a dispute does arise. However, if there is no arbitration clause in the parties’ contract, and a dispute arises, at that time the parties can nonetheless enter into an agreement to arbitrate, if both sides agree. Such an agreement is generally referred to as a submission agreement. However, submission agreements are much less common than arbitration clauses in contracts, because once a dispute arises, the parties often cannot agree on anything. For that reason, it is generally better for the parties to agree to arbitrate at the beginning of the relationship, when they are still on good terms.