The arbitration clause: relevant for your document?

An arbitration clause stipulates that a dispute will not be settled by an ordinary (government) court, but by one or more independent arbitrators. For entrepreneurs, this can be attractive if you want disputes resolved quickly and with expert professional knowledge, for example in the construction or engineering sectors. However, arbitration can turn out to be more expensive, and in agreements with consumers, such a clause has been particularly vulnerable to annulment since 2015. Whether an arbitration clause is worthwhile for your document therefore depends on the type of agreement, your counterparty, and the stakes involved.

What is an arbitration clause?

An arbitration clause is a provision in an agreement or in general terms and conditions by which parties agree that disputes shall be submitted to arbitration rather than to a state court. The arbitrators are often experts from the relevant industry who possess the technical knowledge to assess a dispute on its merits.

Arbitration is common in the construction sector and in various standard models and industry terms and conditions. An arbitral award is, in principle, binding: parties therefore deliberately refer the dispute outside the ordinary courts. This distinguishes arbitration from, for example, mediation, where parties attempt to reach a solution together without a third party imposing a binding decision.

Arbitration clause versus dispute clause and choice of forum

An arbitration clause is sometimes confused with other dispute resolution provisions. It is good to have a clear distinction:

• Arbitration clause: the dispute is settled by arbitrators, not by a state court.
• Choice of forum: the parties do opt for the ordinary court, but agree on which court has jurisdiction.
• Binding advice clause: a third party provides binding advice, but the procedure is more informal than formal arbitration.
• Mediation clause: the parties agree to first attempt a mediation process before resorting to litigation.

Which form is appropriate depends on your industry, your counterparty, and the nature of the potential conflicts. Often, these agreements are laid down in a dispute resolution clause or final provision of the contract.

Advantages and disadvantages of an arbitration clause

Whether an arbitration clause is worthwhile depends on weighing the advantages against the disadvantages. For entrepreneurs, expertise, speed, and costs play a particularly important role.

Advantages

• Subject matter expertise: arbitrators are often industry specialists, which comes in handy in technically complex disputes.
• Faster turnaround time: arbitration can prevent, for example, construction work from being halted unnecessarily.
• Confidentiality: arbitration proceedings are generally not public, unlike proceedings before an ordinary court.
• Choice of arbitrators: parties often have influence over who judges their dispute, which can provide certainty regarding the required expertise.

Disadvantages

• Higher costs: arbitrators' fees and litigation costs can turn out to be significantly higher than before a state court, where you in principle only pay court fees.
• Limited legal protection: the possibilities to challenge an arbitral award are more limited than when appealing a judicial decision.
• Vulnerable with consumers: vis-à-vis consumers, an arbitration clause can be more easily deemed unfair and consequently fail.

Therefore, do not make the assessment as a standard, but per type of agreement. What suits a large B2B construction project is by no means always suitable for an agreement with a private client.

Arbitration clause and consumers: pay attention to voidability

If an arbitration clause is included in an agreement with a consumer, extra caution must be exercised. Under the influence of the European Directive on unfair terms in consumer contracts (Directive 93/13/EEC), the court scrutinizes such a clause. If the clause amounts to an unreasonable restriction of the consumer's legal protection, it may unreasonably burdensome and therefore voidable .

The one-month selection period (blacklist)

Since the modernization of arbitration law (effective January 1, 2015), the arbitration clause against consumers is included on the so-called blacklist of general terms and conditions (Article 6:236, sub n, of the Dutch Civil Code). The essence of this is practical: an arbitration clause against a consumer is in principle voidable, unless the consumer is given at least one month, after a written appeal to the clause, to choose the court with ordinary jurisdiction instead.

If you want to structure arbitration for consumers in a sustainable manner, then explicitly include such an option. Between professional parties (B2B), this blacklist rule does not apply: entrepreneurs are expected to be able to foresee the consequences of an arbitration clause.

What does the judiciary say?

It is important to note that an arbitration clause is not automatically unreasonably onerous. In its judgment of 21 September 2012 (Van Marrum/Wolf), the Supreme Court ruled that an arbitration clause in general terms and conditions is not by definition unreasonably onerous, but must be assessed against the open standard of Article 6:233 of the Dutch Civil Code, taking into account the European directive. Moreover, the court must provide sound reasoning as to why a clause is or is not unreasonably onerous in the specific case, considering, among other things, the nature and content of the agreement, the manner in which the terms were established, and the mutually known interests of the parties. The fact that one party is in a significantly stronger financial position than the other may be a factor in this assessment.

An arbitration clause that is easily voidable offers a false sense of security: in the event of a dispute, you still fall back on the ordinary courts.

Also bear in mind that a judge must personally assess the unfairness of a clause in a consumer contract if necessary, even if the consumer does not invoke this. Therefore, do not count on an untenable clause “quietly” remaining in force.

How much does an arbitration procedure cost?

A frequently asked question is what arbitration costs compared to a regular court. An exact figure cannot be given, as it depends heavily on the arbitration institution, the number of arbitrators, and the size of the dispute. However, there are a few standard points to consider:

• In principle, you pay court fees before a state court; in arbitration, you also pay the fee of the arbitrator(s) and the administrative costs of the institution.
• More arbitrators or a specialist panel generally mean higher costs.
• Confidentiality and speed can save money elsewhere, for example because a project does not come to a standstill unnecessarily.

Therefore, weigh the expected litigation costs against the financial importance of the dispute. For minor disputes, arbitration can turn out to be relatively expensive; for large, technical projects, however, the added value may outweigh the costs.

When is an arbitration clause useful for your document?

Include an arbitration clause only when arbitration truly aligns with the parties' wishes or when the benefits clearly outweigh the disadvantages. This is the case, for example, if:

1. extensive technical expertise is required to assess the dispute;
2. parties consciously desire a fast turnaround time ;
3. It concerns an agreement between professional parties (B2B), where consumer protection plays no role.

It may be wise to explicitly include the reason for arbitration in the clause. This makes the parties' conscious choice visible, which can improve the validity of the clause. If you are unsure whether arbitration is appropriate for your situation, consult a contract law before including it.

Step-by-step plan: include arbitration clause

1. Determine your counterparty. Does it concern consumers or professional parties? Stricter requirements apply to consumers.
2. Weigh the added value. Is technical expertise, speed, or confidentiality truly decisive for this type of dispute?
3. Build in a choice period for consumers. Give the consumer at least one month to still opt for the ordinary court.
4. Record the reasoning. State in or alongside the clause why arbitration was chosen.
5. Have the clause reviewed. A legal expert assesses whether the clause aligns with your agreement and current case law.

Frequently asked questions about the arbitration clause

What is the difference between arbitration and a regular court?

In an ordinary court, a state judge settles the dispute; in arbitration, one or more (often specialized) arbitrators do so. Arbitration is usually closed-door and can be faster and more substantive, but often also more expensive, with more limited options to challenge the ruling.

Is an arbitration clause always valid?

No. Between professional parties, an arbitration clause is generally legally valid, but vis-à-vis consumers, it may be deemed unreasonably burdensome and therefore voidable. It is assessed on a case-by-case basis whether the clause unduly restricts the legal protection of the other party.

Can I include an arbitration clause in my general terms and conditions?

That is possible, but it requires careful attention. Especially when dealing with consumers, you run the risk that the clause will be invalidated if you do not offer a time limit for alternative courts. Therefore, have the text and the justification drafted carefully so that the clause aligns with the nature of your agreements and your counterparty.

Does the one-month choice period also apply between entrepreneurs?

No. The rule that a consumer must be given at least one month to opt for the ordinary courts specifically protects consumers. That blacklist rule does not apply between professional parties; in that case, the clause is assessed against general standards.

What happens if an arbitration clause is invalidated?

If the clause is annulled, the agreement to resort to arbitration lapses, and the ordinary court becomes competent. You then lose the intended benefit of arbitration and may face additional costs and delays.

Is an arbitral award binding and enforceable?

An arbitral award is in principle binding on the parties. If you wish to have it enforced while the other party does not cooperate, a separate step before the ordinary courts is usually required. The possibilities for challenging the award on its merits are limited.

Does an arbitration clause also apply if the other party has not read the contract?

The clause must have been agreed upon in a valid manner. Especially with general terms and conditions, rules apply regarding the manner in which they are provided. If this has not been done properly, the other party may be able to invalidate the clause. Careful recording is therefore important.

Have an arbitration clause drafted or reviewed

Do you want to include an arbitration clause in an agreement or in your general terms and conditions? MKB Juristen first assesses whether arbitration is meaningful and tenable in your situation. After all, a clause that is easily invalidated is useless. If the clause does have a chance of success, we will draft it for you and take relevant case law into account, so that it is not unnecessarily vulnerable.

Are you facing a legal issue regarding contracts or terms and conditions? View our options for contract law, get your general terms and conditions right immediately, or schedule an intake meeting directly to discuss your situation.