Arbitration sounds like a term you might have found in a union dispute a few decades ago, but it is more and more common in the business world. You’ll run across it in employment contracts, credit card agreements, and retail contracts all the time, so it’s good to know what it means and how arbitration works. In particular, you may have seen a mandatory arbitration clause in a contract.
Arbitration is the process of bringing a business dispute before a disinterested third party for resolution. The third party, an arbitrator, hears the evidence brought by both sides and makes a decision. Sometimes that decision is binding on the parties. To arbitrate a matter is to bring it before an arbitrator. An arbitrator is a spectator, witness, or hearer.
Arbitration is a form of alternative dispute resolution (ADR), used in place of litigation in the hope of settling a dispute without the cost and time of going to court. Litigation is a court-based process that involves a decision that is binding on both parties and a process of appealing the decision.
Arbitration is often confused with mediation, which is an informal process of bringing in a third party who goes between the disputing parties to help them settle a dispute. The arbitration process is binding on the parties, and the arbitrator hears evidence prior to rending a decision.