Should I sign an arbitration agreement? Everything You Need to Know

If you have ever signed a contract of any kind, you have probably asked, “Should I sign an arbitration agreement?”  The most common place that people may see an arbitration agreement that gives them pause is in an employment agreement.  Many companies have been begun to include arbitration agreements in their contracts with employees because it may make dispute resolution cheaper and faster; however, some employees question the efficacy and the fairness of requiring an agreement as part of the employment.  This article will quickly discuss what an arbitration agreement is and then move into a discussion of the benefits and drawbacks of signing an arbitration agreement with an employer.  Finally, this article will discuss the considerations that an employee should make when choosing whether to sign an arbitration agreement.

What Does Signing an Arbitration Agreement Do?

Before other discussions, it is important to understand what an arbitration agreement is and what signing it will do.  In short, an arbitration agreement is an agreement between the parties that any disputes that may arise between the parties will be submitted to arbitration rather than litigation.  Typically, when a party signs an arbitration agreement, they will have to bring a dispute that deals with the contract that the agreement is in arbitration.  So for example, if an employee signs an arbitration agreement as a part of an employment contract, if there is an employment dispute between the employee and employer, it must go to arbitration.  However, if a dispute arises between an employee and an employer based on a car accident offsite and outside of work, the dispute could be submitted to litigation.

Types of Arbitration Agreements

In general, most arbitration agreements will be mandatory arbitration agreements between the parties, meaning that they are bound by the agreement and cannot choose litigation over arbitration, except in a few instances where there was no bargaining power and the contract is unconscionable.  However, there are a few other classifications for arbitration agreements that may change the impact of an arbitration agreement.  These classifications include:

  • Mandatory: As mentioned above, a mandatory arbitration agreement means that the parties must submit a dispute that arises to arbitration.
  • Voluntary: A voluntary arbitration agreement usually arises after a dispute has already arisen, and it means that the parties choose to submit this specific dispute to arbitration.  It could also be included in a contract as a preference for arbitration; however, it would not have the power to enforce.
  • Binding: This is more about the type of arbitration, by an agreement may submit a dispute to binding arbitration, which means that the decision by the arbitrator must be followed by the parties.
  • Nonbinding: Conversely, an agreement for a nonbinding arbitration agreement means that a dispute will be submitted to arbitration, but the decision of the arbitrator is a suggestion to the parties as a way of fairly dealing with the dispute.  The parties may decide to follow the award or to come up with their solution.

Benefits of an Arbitration Agreement

Regardless of the type of arbitration agreement, signing any type of arbitration agreement will provide certain benefits and drawbacks for the parties.  Some benefits for one party will be drawbacks for the other, and vice versa.  Because this article is aimed at helping employees decide if signing an arbitration agreement is the best practice, the benefits and drawbacks will be discussed from the employee’s point of view.  However, the effect on the employer will be noted when dramatically different.

Some benefits of signing an arbitration agreement include:

  • Speed: Litigation can take a very long time, especially in places where the courts are very backed up.  A trial may be set months or years from the time a claim arises.  Employment disputes also often involve regulatory agencies with incredibly slow-moving dockets. Arbitration, on the other hand, maybe completed fairly quickly.  Depending on the complexity of the issue, an arbitration may be completed in a few months.
  • Experts: If a dispute involves a particular type of issue that requires some sort of specialized knowledge, the parties may choose an arbitrator with knowledge of the subject matter and avoid costly expert witness before a judge who may have little to no knowledge or experience with the subject matter.
  • Expense: This is usually a benefit for both parties.  As mentioned in the previous two points, there are many places where the parties may save money in arbitration over litigation.  Litigation requires court costs and the parties will have to pay their lawyers for all the time and discovery costs.  Expert witnesses are often very expensive as well.
  • Privacy: Employment disputes may involve sensitive topics and the parties may not want their dispute to be heard in a public court. Arbitration offers a place for these disputes to be heard confidentially.  However, it is important to note that privacy may also be used to the disadvantage of an employee.  If an employer is consistently taking certain disputes to arbitration and the employees are not able to discuss the outcome, many employees may be facing similar issues with their employer, yet not addressing the root cause of it.  Watching for this in the workplace is important and should be noted.
  • Informality: Arbitration does not have the same formality as litigation.  The parties are often seated around a table and participate in a more conversational discussion.  The rules of evidence and other rules are not as strict or do not apply, making it easier to present a case.  This can be beneficial for parties without resources and unable to afford lawyers.
  • Finality: Arbitration awards are usually final and binding, and the possibility of an appeal is very limited.  Therefore, it is unlikely that it will drag out.

Drawbacks of Arbitration Agreement

There are also some drawbacks to having a signed arbitration agreement.  These drawbacks include:

  • Finality: While finality can be a benefit, it can also be a drawback, especially for the party that the arbitrator does not side with.  This can be particularly problematic when arbitration agreements are signed by a person without much bargaining power, so the arbitration agreement will need to be evaluated, as discussed below.
  • Discovery: Discovery is limited in arbitration and often faster, leaving less time to thoroughly investigate the situation.  This can be particularly problematic if a company dumps a lot of documents on discovery requests to an employee who does not have the capacity to review.
  • Injunctions: Litigation allows parties to request relief in the interim between the beginning of the dispute and the decision by the judge or jury.  This can be beneficial for parties who need the other to stop doing something or continue doing something until the decision is made.  This is not usually available in arbitration. An arbitrator may make an emergency decision to control the actions of the parties in the interim, but usually, the parties would have to agree to give the arbitrator that power, and that is often unlikely.
  • Splitting: There is a chance that an arbitrator may make a decision that holds both parties responsible to the other and can result in a “win” that limits recovery for employees.  This can often result in very small recoveries for employees that are very unlikely in litigation, which tends to decide for one party or the other.

Considerations When Signing an Agreement

So now understanding the benefits that signing an arbitration agreement can provide, and taking into account the possible drawbacks, there are a few important considerations to make when deciding whether to sign an arbitration agreement.  These include:

  1. How much choice does the agreement provide? Some agreements will allow the parties to choose an arbitrator together or have one appointed by an organization.  However, parties should be wary of an agreement that gives control of the choices in the arbitration to the other party.
  2. What does the balance of power look like? If arbitration would place a big company with many lawyers on retainer against an employee will few resources, it may be best to discuss the implications of the agreement before signing it.
  3. Can the employee oppose the agreement and still have a job? If it is not possible for the employee to refuse to sign the arbitration agreement if they have reservations about the agreement and still have the job, they should record that they object to the agreement and sign the contract to start their job. This may provide a way for the employee to object later on.
  4. Would arbitration be beneficial for the party? If arbitration would be beneficial for the employee, which it can be in situations where the balance of power is more even, it may be the best option and an employee should sign it.

Conclusion

Signing an arbitration agreement as part of a larger agreement is an important consideration that cannot be taken lightly.  Such an agreement will likely bar the party from bringing a suit in court and bind them to an arbitration decision, so certain rights and wishes must be considered.  However, arbitration has many advantages that may benefit employees more than litigation would, but it also has some drawbacks that need to be considered.  While arbitration may seem scary and restricting, understanding the basics of arbitration and using the advantages provided by arbitration to an employee’s advantage may allow the employee to overcome even the most imbalanced of arbitration agreements.  Arbitration agreements can save everyone time and money, but they must be entered into with caution and understanding to truel achieve the benefits promised.

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