What is the purpose of a mandatory arbitration agreement in a contract?

A mandatory arbitration agreement in a contract serves to require dispute resolution outside of court. This type of agreement typically stipulates that if any disputes arise between the parties involved in the contract, those disputes will be resolved through arbitration rather than through litigation in the court system.

Arbitration is a private process where an impartial third party, the arbitrator, hears the arguments and evidence from both sides and makes a binding decision. This approach often leads to faster resolution times and can be less costly compared to traditional court proceedings. By incorporating a mandatory arbitration clause, the parties agree in advance to bypass the court system, which can alleviate the burden on courts and streamline the resolution process.

The other options relate to different concepts entirely—litigation refers to court processes, interest rates pertain to financial agreements, and property tax issues are unrelated to contract terms or dispute mechanisms. Thus, the focus on alternative dispute resolution is what defines the purpose of a mandatory arbitration agreement.