Arbitration Clauses

June 9, 2021

What is arbitration?

It is now common for most consumer businesses to put standard arbitration clauses in their contracts. Arbitration is a private type alternative dispute resolution (ADR) where one Arbitrator, often a retired judge, will decide the matter. 

There is no jury, very limited discovery of facts, and limited appeal rights, if any at all. Almost all the Fortune 100 companies use them. 

It is not like you have much of a choice. After all, who really reads the “Terms and Conditions” before hitting “I Agree”? Even if you did not like the arbitration clause, you are in position to negotiate them as just one customer out here. 

These arbitration clauses bar you from suing in a court of law or ever seeing a jury at all. Note that this is in contravention of the Seventh Amendment to the U.S. Constitution.

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Advantages and Disadvantages of Arbitration

Advantages. Arbitration is usually faster, simpler, more efficient, and more flexible for scheduling than litigation. It can be cheaper. It avoids courtroom disputes, because it’s a private proceeding versus the public drama of the courtroom. And if the subject of the dispute is technical–for example, about a patent or construction –the parties can select an arbitrator who has technical knowledge in that field, rather than a judge who may not be familiar with the issues, and a jury who certainly will not. 

Disadvantages. Unlike a court ruling, a binding arbitration ruling can’t really be appealed. It can be set aside only if a party can prove that the arbitrator was biased or that the arbitrator’s decision violated public policy. Unlike a court case, there is no automatic right to discovery and subpoenas. It is mostly a court of no appeal. 

Here is sample language you may see:

Arbitration. All claims and disputes arising under or relating to this Agreement are to be settled by binding arbitration in the state of Tennessee or another location mutually agreeable to the parties. The arbitration shall be conducted on a confidential basis pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Any decision or award as a result of any such arbitration proceeding shall be in writing and shall provide an explanation for all conclusions of law and fact and shall include the assessment of costs, expenses, and reasonable attorneys' fees. Any such arbitration shall be conducted by an arbitrator experienced in [insert industry or legal experience required for arbitrator] and shall include a written record of the arbitration hearing. The parties reserve the right to object to any individual who shall be employed by or affiliated with a competing organization or entity. An award of arbitration may be confirmed in a court of competent jurisdiction.

So, the result can be enforced by a local court, but your local court is not able to actually decide or review the dispute!

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