What is Commercial Arbitration?

Commercial arbitration is a means of resolving business disputes between two or more parties outside of a formal court system. Generally, the arbitration works similarly to a court trial, although the setting is more informal. An arbitrator or a panel of arbitrators usually serves as both judge and jury. Typically, each company is represented by an arbitration lawyer, who presents the company's side of the case to the arbitrator. After reviewing all of the evidence, the arbitrator renders a decision in the case.

Entities involved in a business dispute must agree to commercial arbitration, also called business arbitration, as a way to resolve the disagreement. This is usually done by inserting an arbitration clause into the parties’ general business contract. Contract arbitration clauses can vary greatly.

For example, the parties may agree to make the commercial arbitration mandatory or voluntary. If the arbitration is mandatory, the parties must use it as a means of resolving the disagreement. Voluntary arbitration, on the other hand, is optional. In a voluntary situation, the parties are not required to use arbitration as a means of resolving a particular dispute. They could, for instance, decide to resolve the case through mediation or through a court system.

Most commercial arbitration clauses require that the arbitrator’s final decision be binding on the parties. Essentially, this means that the parties must adhere to the final decision, just as they would if it were handed down by a court. In some cases, limited appeal rights are permitted. For instance, if an arbitrator was bribed by one of the parties, the other party’s arbitration attorney could appeal the arbitrator’s decision to a court. In contrast, non-binding arbitration does not require the parties to adhere to a final decision.

In the international context, commercial arbitration is often used to resolve disputes arising from international treaties, agreements, and conventions. A key benefit of using commercial arbitration is that it allows a way for companies that are not a part of the same court system to effectively solve business disputes. International arbitration can also be quicker, simpler, and less expensive than traditional court cases. In addition, it eliminates the possibility of a foreign court decision being rendered unenforceable.

Commercial arbitration is usually categorized as either institutional or ad hoc. Ad hoc arbitrations generally operate in line with rules that have been agreed to by the parties. The parties also negotiate the selection and number of arbitrators, governing law, and where the arbitration will occur.

Institutional arbitration relies on independent, pre-established rule sets to govern the arbitration proceedings. These rules usually specify, among other things, the number of arbitrators used, the arbitration location, arbitrator fees, and arbitrator appointments. They also frequently state which set of arbitration procedural and evidentiary rules will apply to the proceedings. Additionally, institutional arbitration usually specifies a process for reviewing arbitral awards.