Arbitration Clauses in Business Contracts: How to Draft One That Actually Works
Arbitration clauses are among the most consequential provisions in any commercial contract, yet they are frequently drafted as an afterthought — copied from a template, buried at the end of the agreement, and rarely read carefully by either party until a dispute arises. A poorly drafted arbitration clause can be unenforceable, can create procedural problems that add cost and delay, or can produce a dispute resolution process that neither party anticipated. This post identifies the issues that practitioners focus on when drafting arbitration clauses in New Jersey and New York business contracts.
The Basic Building Blocks
An enforceable arbitration clause needs to clearly express the parties’ agreement to arbitrate — meaning it must identify the disputes that are subject to arbitration, designate an arbitral forum or set of rules, and reflect a mutual agreement rather than a unilateral imposition. Courts in New Jersey and New York apply the Federal Arbitration Act and state law in evaluating whether an arbitration clause is enforceable, and defenses including unconscionability, lack of mutual assent, and failure to provide adequate notice can result in a clause being voided.
Choosing the Right Rules and Administrator
Arbitration clauses typically designate a set of rules to govern the proceeding — most commonly the Commercial Arbitration Rules of the American Arbitration Association (AAA), the rules of JAMS, or the CPR Rules for Administered Arbitration. The choice of rules matters. Different sets of rules have different procedures for selecting arbitrators, managing discovery, handling preliminary motions, and allocating costs.
The American Arbitration Association’s 2024 data shows that the AAA administered more than 13,000 business-to-business commercial cases in 2024, making it one of the most experienced and widely used forums for commercial dispute resolution. Its rules are well-tested and its arbitrator panel is large and experienced across industries. That said, the right choice of rules and administrator depends on the industry, the anticipated dispute size, and the parties’ preferences — and the clause should specify a set of rules, not just a forum name, to avoid ambiguity about which rules apply.
Scope of the Clause
The scope of an arbitration clause — what disputes it covers — is one of the most litigated issues in arbitration law. A broad clause covering “any dispute arising out of or relating to this agreement” will capture most disputes between the parties. A narrower clause covering only “disputes about the interpretation of this agreement” may leave significant categories of claims outside arbitration, resulting in parallel proceedings in court and before an arbitrator.
In general, broad arbitration clauses are easier to administer and reduce the risk of jurisdictional disputes about whether a particular claim is subject to arbitration. Narrow clauses may be appropriate in specific contexts where the parties want to reserve certain claims — such as claims for emergency injunctive relief or intellectual property disputes — for court adjudication.
Number of Arbitrators
Most commercial arbitration clauses provide for either a single arbitrator or a panel of three. A single arbitrator is faster and less expensive. A three-arbitrator panel is more common in large or complex disputes and provides a broader range of perspectives on the issues. The AAA’s 2024 data shows that in large-dollar commercial cases, 73 percent of technology disputes selected a single arbitrator — reflecting a trend toward efficiency even in significant matters. The clause should specify the number of arbitrators or provide a clear mechanism for determining it based on claim size.
Seat, Governing Law, and Confidentiality
The seat of the arbitration — the legal place where the arbitration is conducted — affects which court has jurisdiction to hear challenges to the award and which procedural law governs the arbitration itself. For disputes between New Jersey and New York parties, designating New York or New Jersey as the seat is common. The clause should also specify the governing law for the underlying contract — which may be different from the law governing the arbitration procedure — and should address confidentiality explicitly if the parties want the proceedings and award to remain private.
Carve-Outs for Emergency Relief
One practical provision worth including is a carve-out permitting either party to seek emergency injunctive relief from a court of competent jurisdiction without waiving its right to arbitrate the underlying dispute. While the AAA’s emergency arbitrator procedures provide some interim relief options, court-ordered injunctive relief may be more immediately effective in some circumstances. A well-drafted carve-out preserves the option without undermining the arbitration clause.
Business owners who want to include an arbitration clause in their contracts — or who are reviewing an existing clause — should work with a business attorney to ensure the clause is enforceable under applicable law and structured to produce the kind of dispute resolution process they actually want. The AAA’s rules and resources, including its model arbitration clauses, provide a useful starting point, but the clause needs to be tailored to the specific contract and business relationship.
Disclaimer
The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. This post is for informational purposes only and does not constitute legal advice. It is not an offer for Russo Law LLC to represent any party, nor does it create an attorney-client relationship. No action or inaction should be taken based on the information provided without seeking professional legal counsel. This post is intended for businesses in New York and New Jersey and may not reflect laws in other jurisdictions.
Do not send confidential or sensitive information through this website or in response to this blog post. Unsolicited information does not create an attorney-client relationship and should not be treated as privileged or confidential.