Those Ubiquitous Arbitration Clauses

How many times have you agreed to “binding arbitration” in case of a dispute over a product you bought or a service you signed up for?

Whether you know it (because you conscientiously read contracts before signing them) or not (you don’t), there’s a good chance your answer should be “a lot.” Arbitration provisions now crop up all over the place, from the terms for computer software[1] to cable TV contracts[2] to bank checking and savings accounts agreements[3] to the purchase agreement for a new car. Arbitration clauses commonly appear in commercial contracts and professional services agreements. They might be included in a shareholder agreement for a closely held company. Sometimes they are used in places they aren’t supposed to be used.[4]

What does an arbitration agreement accomplish?

Ordinarily, a person who has a dispute[5] with someone else may ask a court to decide which of them is correct.  At bottom, that is what civil litigation is: a process for obtaining from a court a binding decision about how a dispute should be resolved. Obviously the person who loses would prefer to simply ignore the court’s decision, but she cannot do that because the law says that the court’s decision may be enforced by the sheriff (for a state court) or the U.S. Marshals Service (for a federal court) if the loser does not comply.

The process of obtaining a decision from a court has drawbacks. It can be long, expensive, and painfully public. To give disputing parties an option for avoiding this process, the law allows them to resolve their dispute in another way if both agree. That alternative is arbitration, which simply means that two parties voluntarily commit to having someone else, not a court, resolve their dispute. The decision-maker is an arbitrator. An arbitration agreement essentially allows the winning party to enforce the arbitrator’s decision in the same way that he could enforce a court’s decision, by having a court confirm the arbitrator’s award.[6]

An arbitration agreement is a commitment by two parties to have a dispute between them resolved by an arbitrator instead of a court. The agreement binds the parties to the decision of the arbitrator.

Arbitration has at least three potential benefits.

  • First, arbitration allows the parties to create a customized method of resolving the dispute. Generally speaking, all litigation in court must follow the same rules (the rules of civil procedure) no matter what the dispute is about and no matter how cumbersome the rules might be in those particular circumstances. But an arbitration can be structured to use any approach that both parties agree on. It can provide for limited or extensive exchange of information by the parties prior to the presentation of evidence. Arbitration can establish strict limits upon the arbitrator’s decision-making, such as a “baseball arbitration,” where each side submits a proposed award and the arbitrator is required to choose one proposal or the other. Arbitration can provide short deadlines, to obtain a faster resolution of the dispute. The parties may structure an arbitration however they (jointly) choose, and they may (jointly) choose the arbitrator, which allows them to choose someone with expertise in the topic area of the dispute, if they so wish.
  • Second, arbitration is often less expensive than using the courts. The rules of civil procedure provide for many procedural steps that consume time and attorney attention, thereby raising the parties’ cost for resolving the dispute. An arbitration, in which the arbitrator may modify or eliminate procedural hurdles, can result in lower fees for the parties – though the additional cost of paying the arbitrator must be considered.
  • Third, arbitration may be kept confidential. Court filings generally become part of a public record. Parties who wish to keep information about their dispute out of the hands of the public may decide to use an arbitrator, since then they may then keep their evidence and arguments secret, available only to the arbitrator.

Of course, under the right circumstances each of these potential benefits of arbitration may turn into a drawback. If parties like the procedural protections afforded by the rules of civil procedure, if parties do not want to pay an arbitrator in addition to their own attorney, or if parties want to have case documents and evidence available to the public, then arbitration may not be a good option for them. Also, arbitration awards are generally not appealable, so a party who wants to preserve his right to appeal an unfavorable decision may choose for that reason to avoid arbitration.


[1] For example, the Microsoft Service Agreement.

[2] Like the one used by Cox Cable.

[3] Wells Fargo.

[4] For example, as a required agreement for employees.

[5] For example, Jane says that her company’s CEO John took thousands of dollars in improper expense reimbursements; John says all the reimbursements were justified. Xavier says Vincent agreed to sell him 100,000 gallons of gas at $2.00 per gallon; Vincent says the contract does not require him to sell at that price now that gas is selling for $3.00 per gallon. Tonya accuses Violet of fraudulently overstating the profits of the business that she sold to Tonya; Violet says the profits were accurately disclosed.

[6] The Federal Arbitration Act and Minnesota’s Uniform Arbitration Act make arbitration agreements enforceable and require courts to confirm an arbitrator’s award except under certain limited circumstances. See Minn. Stat. §§ 572B.22, 23, 24 and 9 U.S.C. §§ 9, 10, 11.


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