What Is Arbitration? How It Works, Costs and When to Choose It

Last updated: 19 October 2026. This guide explains arbitration under US federal law and the law of England and Wales, with notes on international cases. Fees quoted are those published by the main arbitral institutions as of October 2026. It is general information, not legal advice.

Short answer: Arbitration is a private way of resolving a dispute in which the parties agree to let one or more neutral arbitrators decide it instead of a court. The arbitrator’s decision, called an award, is usually final and binding and can be enforced like a court judgment, with only narrow grounds for challenge. Most arbitrations happen because a contract contains an arbitration clause.

Key takeaways

• Arbitration is based on agreement. In the US, the Federal Arbitration Act makes written arbitration agreements “valid, irrevocable, and enforceable”, subject to ordinary contract defences.
• Awards are hard to overturn. US courts can vacate an award only for reasons such as fraud, evident partiality or arbitrators exceeding their powers, not because they got the law wrong.
• Costs vary widely: a consumer filing with the American Arbitration Association pays a $225 filing fee, while large international cases can run into millions in arbitrator and legal fees.
• Arbitration suits confidential, cross-border and technical disputes; court may be better where you need precedent, a jury, appeals or a class action.

What is arbitration?

Arbitration is a form of alternative dispute resolution (ADR), alongside negotiation and mediation. Our explainer on the concept of alternative dispute resolution sets out the wider family. What makes arbitration different is that the arbitrator decides the dispute. A mediator, by contrast, only helps the parties reach their own settlement.

Arbitration can be:

• Binding or non-binding. Most commercial and consumer arbitration is binding. Some courts and contracts use non-binding arbitration as a step before trial.
• Institutional or ad hoc. Institutional arbitration is run under the rules of a body such as the American Arbitration Association (AAA), JAMS, the International Chamber of Commerce (ICC) or the London Court of International Arbitration (LCIA). Ad hoc arbitration is run by the parties and tribunal themselves, often under the UNCITRAL Arbitration Rules.
• Domestic or international. International arbitration involves parties from different countries and is the standard method for resolving cross-border commercial and investment disputes.

How does arbitration work, step by step?

Procedures vary by institution and contract, but a typical case follows these stages:

1. The arbitration agreement. The parties agree to arbitrate, usually in a clause in their contract signed before any dispute, or occasionally in a separate agreement after a dispute arises.
2. Notice or demand. The claimant files a demand or request for arbitration with the chosen institution, or serves it on the other side in an ad hoc case, and pays the filing fee.
3. Appointing the tribunal. The parties pick one arbitrator or a panel of three, either by agreement, by each side choosing one, or through the institution’s list. Arbitrators must disclose conflicts of interest.
4. Preliminary meeting. The tribunal sets a timetable, decides how much document exchange there will be, and fixes the hearing dates.
5. Written submissions and evidence. Each side files its case, documents, witness statements and any expert reports. Disclosure is usually narrower than in US litigation.
6. The hearing. Witnesses give evidence and are cross-examined, usually in a conference room or online rather than a courtroom. Small cases may be decided on documents alone.
7. The award. The tribunal issues a written decision. It can order payment of money, other remedies and, often, who bears the costs.
8. Enforcement. If the losing party does not pay, the winner asks a court to confirm or recognise the award, which can then be enforced like a judgment.

For a practical view of a domestic hearing, see our guide on preparing for a personal injury arbitration.

What laws govern arbitration?

United States

The Federal Arbitration Act (FAA), first passed in 1925, applies to contracts involving interstate commerce. Its core provision, 9 U.S.C. § 2, makes written arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract”. That means an arbitration clause can be challenged on general contract grounds, such as fraud or unconscionability, but not singled out for special hostility.

The Supreme Court has read the FAA broadly. In AT&T Mobility LLC v. Concepcion (2011), it held that the FAA overrode a California rule that treated most class action waivers in consumer arbitration agreements as unconscionable. In Epic Systems Corp. v. Lewis (2018), it upheld agreements requiring employees to arbitrate individually rather than as a group. Congress cut back on this in one area: the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, signed on 3 March 2022, lets a person bringing a sexual harassment or sexual assault claim choose court even if they signed a pre-dispute arbitration agreement.

England and Wales

Arbitration seated in England and Wales is governed by the Arbitration Act 1996, as amended by the Arbitration Act 2025, which came into force on 1 August 2025 for arbitrations started on or after that date. The 2025 changes include a default rule that the law of the seat governs the arbitration agreement unless the parties expressly agree otherwise, a statutory duty on arbitrators to disclose circumstances that might raise doubts about their impartiality, and an express power for tribunals to dispose summarily of claims or defences with no real prospect of success. Awards can be challenged for lack of jurisdiction (section 67), serious irregularity (section 68) or, unless the parties exclude it, on a point of law (section 69).

English law also protects consumers. Under section 91 of the 1996 Act and a 1999 order, an arbitration clause is automatically unfair against a consumer for a money claim of £5,000 or less, so the consumer can go to court instead.

International arbitration

The main reason businesses choose arbitration for cross-border deals is enforcement. The 1958 New York Convention requires courts in member states to recognise and enforce foreign arbitral awards, with limited exceptions. According to UNCITRAL, it has 172 parties, including the US, the UK and every EU member state. A court judgment, by contrast, may be much harder to enforce abroad. Our articles on WIPO arbitration and international commercial arbitration in the UAE look at specialist and regional options.

How much does arbitration cost?

There are three main cost items: the institution’s fees, the arbitrators’ fees, and each side’s own legal costs, which are usually the largest. The table shows published institutional fees as of October 2026.

Sources: the AAA consumer fee schedule, JAMS arbitration fees, the ICC 2021 Rules and the LCIA Schedule of Costs effective 1 December 2023.

For consumers and employees in the US, arbitration can be cheaper than court because the business pays most of the fees. For large commercial cases, the picture is different: three-member tribunals billing by the hour, plus counsel and experts, can make international arbitration as expensive as complex litigation. Many institutions offer expedited procedures for smaller claims to keep costs down.

What are the pros and cons of arbitration?

Finality cuts both ways. Under 9 U.S.C. § 10, a US court can vacate an award only where it was procured by corruption, fraud or undue means, where there was evident partiality or corruption in the arbitrators, where the arbitrators were guilty of misconduct such as refusing to hear material evidence, or where they exceeded their powers. A party that loses on a legal error usually has no remedy.

When should you choose arbitration?

Arbitration tends to work well when:

• the parties are in different countries and want an award that can be enforced in either;
• the dispute is technical, such as construction, energy, intellectual property or reinsurance, and an expert decision-maker helps;
• confidentiality matters, for example to protect trade secrets or reputation;
• both sides want a final result without years of appeals.

Court, or mediation first, may be better when:

• you need an urgent injunction against a third party who is not bound by the arbitration agreement;
• the claim is small and court or a small claims procedure is cheaper;
• you want to bring a group claim, which our comparison of mass actions and class actions discusses;
• the parties still have a working relationship and a negotiated settlement is realistic. Our guide to how mediation resolves disputes without court covers that route.

Many commercial contracts now use a tiered clause: negotiation first, then mediation, then arbitration if the dispute is still unresolved.

What should an arbitration clause include?

A badly drafted clause can lead to expensive arguments before the real dispute is even heard. A well-drafted clause usually states:

• the scope, such as “any dispute arising out of or in connection with this contract”;
• the rules and institution, such as the ICC, LCIA or AAA;
• the seat, meaning the legal home of the arbitration, which decides which courts supervise it;
• the number of arbitrators and how they are chosen;
• the language of the proceedings;
• the governing law of the contract and, ideally, of the arbitration agreement itself.

Most institutions publish model clauses, which are a safer starting point than drafting from scratch.

Frequently asked questions

Is arbitration legally binding?

Usually, yes. Unless the agreement says it is non-binding, an arbitration award is final and binding on the parties. A court can confirm it and enforce it like a judgment, and challenges are allowed only on narrow grounds such as fraud, bias or the arbitrator exceeding their powers.

What is the difference between arbitration and mediation?

An arbitrator hears both sides and makes a binding decision. A mediator has no power to decide anything and instead helps the parties negotiate their own settlement. Many contracts require mediation first and arbitration only if mediation fails.

Can you appeal an arbitration decision?

Not in the usual sense. In the US, courts can vacate awards only on the limited grounds in 9 U.S.C. § 10. In England and Wales, challenges are allowed for lack of jurisdiction, serious irregularity or, unless excluded by agreement, an error on a point of law.

Can I refuse to sign an arbitration agreement?

You can refuse, but the other party may then decline to deal with you, and employers in the US can generally make arbitration a condition of employment. Some agreements allow you to opt out within a set period, so check the terms carefully.

Who pays for arbitration?

It depends on the agreement and the rules. In US consumer and employment cases, the business usually pays most of the institutional and arbitrator fees. In commercial cases, parties usually share the advance on costs, and the tribunal can order the loser to pay some or all of the winner’s costs.

How long does arbitration take?

Simple consumer cases decided on documents can finish in a few months. Complex commercial or international cases can take a year or more, depending on the number of witnesses and experts and on how the tribunal manages the timetable.

This article is general information about arbitration and is not legal advice. Arbitration agreements and institutional rules differ, and deadlines to challenge an award can be very short, so get advice from a qualified lawyer before signing or acting on an arbitration clause.