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Arbitration: Definition, Example and Related Terms

What is Arbitration ?

Arbitration is a way to solve disagreements or disputes without going to court. Think of it like a professional argument solver. Let's say you have a disagreement with someone about a business deal. Instead of going to a judge, you both agree to go to an arbitrator, who is like a referee in a game. The arbitrator listens to both sides, checks out the rules (which are the laws and the contract you both agreed to), and then makes a decision. This decision is usually final and it's very difficult to change it, just like the final score of a game. Arbitration can be less formal than a court, and can often be faster and cheaper too. It's commonly used in many types of business disputes, especially in international business where different countries' laws can make things complicated.


  • Scenario Description
    Two companies, A and B, enter into a contract for company B to supply company A with parts for a new product. However, they later disagree on the quality of the parts supplied. In this scenario, company A and B could decide to use arbitration to solve their disagreement. They would both present their arguments to an arbitrator, who would then make a decision based on the evidence and the terms of their contract. The arbitrator might decide that company B needs to replace the parts, or that company A needs to pay for the parts as they are.
    A software development company and a client disagree over the timeline of a project, with the client claiming that the company did not deliver on time as per the contract. The software development company and the client could choose to go to arbitration. They would both explain their sides of the story to the arbitrator, who would then look at the contract and any other evidence. The arbitrator might decide that the company did not breach the contract, or they might decide that the company needs to compensate the client for the delay.

Related terms