Binding Arbitration: What You Need to Know

Arbitration clauses have found their way into many contracts in recent years, and people will often be required to participate in binding arbitration proceedings when a dispute arises based on the contract. Finding a mandatory binding arbitration clause in an agreement can be surprising for some, but arbitration is a vital part of the alternative dispute resolution community. The process also allows the parties to resolve the dispute without lengthy litigation. This article will outline the major components of arbitration as an alternative form and what you may need to know if you are participating in a binding arbitration.

Binding Arbitration: Defined

Arbitration is a mechanism to resolve disputes through a single hearing rather than a months-long trial. It is similar to the court system in some ways but is a more informal proceeding in others. The parties will need to agree that disputes arising from a contract or agreement will be brought to arbitration, which will be discussed in further detail below. The disputing parties will then choose a panel of arbitrators or have them assigned. The arbitrator is a neutral party who will read the briefs prepared and hear the testimony and evidence presented by the parties before issuing the arbitrator’s decision, known as the award.

Whether or not the parties are required to follow the decision of the arbitrator depends on whether the parties have agreed to binding or non-binding arbitration. Binding arbitration means that the parties must follow the arbitrator’s decision when it is issued. The arbitration award acts as a legally binding order. Non-binding arbitration treats the arbitration award more like a suggestion for resolution than an order. Most arbitration agreements will be binding arbitration agreements to ensure that there is a resolution at the end of the proceeding.

Creating an Arbitration Agreement or Clause

Because arbitration is beneficial for resolving disputes, many companies have started to add mandatory binding arbitration clauses to their use contracts, and other industries have started to use arbitration agreements when closing deals. There are even binding arbitration agreements in some employment contracts. For a binding arbitration agreement to be enforceable, the parties must have knowingly agreed to the terms because arbitration is meant to be a voluntary process when it is agreed to. This is because the parties waive their right to a formal trial on the dispute. It is important to understand what both a clause and an agreement to arbitration mean, and how they may be enforced.

An Arbitration Clause

An arbitration clause is the most common way to see an agreement for binding arbitration. It is a section of the contract where the parties agree to bring any dispute arising from the contract to arbitration. The parties need to know that the arbitration agreement is a part of the contract as a whole to ensure that they understand they are agreeing to waive their right to a court trial. Mandatory binding arbitration clauses may also include the signing parties waiving other rights, such as the right to join a class action lawsuit, which may prevent some people from signing.

Arbitration Agreements

Another way that the parties may choose arbitration is through binding arbitration agreements. These most often happen after a dispute has already arisen and the parties have no previous arbitration agreements or arbitration clauses in their contracts. They are far less broad than mandatory binding arbitration clauses because the parties are agreeing to submit a specific dispute to arbitration rather than any dispute that comes out of the contract. This type of binding arbitration agreement is more strictly enforced due to the parties naming the specific dispute.

The Arbitration Process

It can also be useful to understand what the arbitration proceeding will look like. For cases with mandatory binding arbitration clauses or binding arbitration agreements, the parties will acknowledge that they need to use arbitration services to resolve the disputes that they are facing. The enforceability of the agreement can be challenged here, and the courts will settle disputes over the ability to arbitrate. The two parties will contact either an arbitrator or an arbitration organization, such as the American Arbitration Association, to be assigned an arbitrator. Once the arbitrator is assigned, the parties will schedule the arbitration hearing.

The participants will also write briefs that explain the legal issues, relevant evidence, and the potential conflict that they have with the other party. The arbitrator will read these and decide the case based only on the pleadings in some cases. However, there is often a need for a hearing before the arbitrator’s decision is given.

The arbitration hearing will be held on a day that the two people and the arbitrator agree on. The arbitrator or arbitrators will hear the arbitration case and ask one party and then the other to outline the evidence and ask for the specific language that they may want in the binding decision. Once both sides have presented their case, the arbitration will issue a legally binding arbitration decision. Because it is binding, both sides will be required to follow the award, including any requirement to pay damages to the other side.

Occasionally, one party may choose to challenge the decision or the mandatory binding arbitration clauses that led to the arbitration after the award, but these challenges are rarely successful and the contract to participate in mandatory binding arbitration is enforced. If the arbitration is non-binding, the parties can choose whether to follow the arbitrator’s decision or to find an alternative way to resolve disputes, such as going to court.

Pros and Cons of Binding Arbitration

Arbitration can be a successful and reliable way to resolve disputes that the parties are facing. It also brings with it advantages over the resolution process, including less cost to the people involved, particularly with attorneys’ fees. The arbitration cost is lower because it most often moves more quickly and requires less preparation than a case winding its way through the court system. Additionally, unlike a court case, a mandatory binding arbitration case cannot be appealed except for a very narrow set of exceptions, such as a conflict of interest with the arbitrator. This means that the binding arbitration decision will be the controlling decision for all involved.

There are also some disadvantages, such as some mandatory binding arbitration clauses that are buried in the fine print of a contract and prevent customers from suing the company or participating in a class action lawsuit. This can often lead to people feeling duped out of court and into another system of dispute resolution. Other disadvantages include the fact that a party will likely recover fewer monetary damages from the other side than they would if they were collecting from a court case because most arbitrators will not order punitive damages.

Conclusion

Regardless of the disadvantages, arbitrating a case is a great way to resolve a dispute effectively and quickly. For this reason, many companies are choosing to include mandatory binding arbitration clauses in their agreements. Being prepared for such an experience is a great way to ensure a thorough resolution.

To learn more about mandatory arbitration, general arbitration, and more, contact ADR Times today!

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Emily Holland

Contributing Editor at ADR Times

Emily is a recent graduate of Pepperdine Caruso Law.
While in law school, Emily served as an executive editor on the Pepperdine Dispute Resolution Law Journal and had the opportunity to learn about ADR from world-class professors of the Straus Institute for Dispute Resolution.

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