Arbitration Fairness Act of 2009 and Mandatory Arbitration Clauses

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What is a Mandatory Arbitration Clause?

A mandatory arbitration clause is a provision contained in some contracts regarding the manner in which disputes will be resolved. Mandatory arbitration clauses usually state that the parties will not litigate their legal issues in the event that a dispute arises over the contract. Instead, the parties agree to submit to arbitration in order to resolve the dispute. 

The word “mandatory” means required. This means that if the parties agree to a mandatory arbitration clause, they will be required to resolve matters through arbitration, as they have effectively forfeited their rights to litigation. An example of language typically contained in a mandatory arbitration clause is: “All disputes or conflicts arising out of the present contract shall be settled according to rules of arbitration”. 

What is Arbitration?

Arbitration is also known as Alternative Dispute Resolution (ADR). It is similar to a trial, except that there is no formal judge or jury, and the process is kept confidential. The parties agree to submit to the opinion of an arbitrator, who is appointed to mediate the dispute between the parties. The decision of the arbitrator (usually an attorney) is usually binding upon the parties, and oftentimes an appeal is not available. 

Arbitration can be a favorable option in many instances because it does tend to save time and money as compared with a formal lawsuit. However, arbitration can severely limit your options for recovery, as an appeal is not usually available. Also, most arbitration clauses will include the name of the arbitrator or arbitration company that will be used. This may tend to favor the party which created the arbitration clause.  

When are Mandatory Arbitration Clauses Used?

Mandatory arbitration clauses can be found in a variety of different contracts. In fact, any type of contract can contain an arbitration clause if the parties wish so. 

Mandatory arbitration clauses are most common in the following types of contracts:

  • Contracts for the sale of goods and services
  • Employment contracts
  • Automobile purchases
  • Various agreements, such as credit card, rental, and cell phone agreements

Usually one side will present the arbitration clause, and the other will agree to it. Sometimes the arbitration clause will be buried in fine print at the end of the contract, so be sure to review any contract thoroughly before signing it. 

Which Laws Cover Mandatory Arbitration Clauses?

The main law governing arbitration clauses is the Federal Arbitration Act. The Act governs the enforceability of arbitration clauses in a contract. It states that such clauses will be enforced in any contract involving transactions across state boundaries, or where the transaction deals with maritime laws. Thus, the Federal Arbitration Act creates a very strong policy in favor of enforcing mandatory arbitration clauses. 

If the Federal Arbitration Act is not applicable, state laws will regulate the use of mandatory arbitration clause. These may vary widely from state to state. In fact, some states contain laws that are the extremely different from those of other states. For example, California allows parties to set aside an arbitration clause if the contract is not valid, or if the parties consent to taking out the clause. On the other hand, the state of New York prohibits mandatory arbitration clauses altogether in consumer contracts.

Finally, a new piece of legislation called the Arbitration Fairness Act of 2009 is currently being reviewed.   This is a very important bill and could have major consequences in the areas of contracts and mandatory arbitration clauses. 

If passed, the Arbitration Fairness Act would prohibit businesses and companies from forcing mandatory arbitration upon consumers. It would make arbitration voluntary rather than mandatory. Thus, the Arbitration Fairness Act would directly oppose the current policy of enforcing mandatory arbitration.  

Do I Need a Lawyer for Mandatory Arbitration Clause Disputes?

As with any contract issue, disputes over mandatory arbitration clauses are serious and could affect the overall outcome of contract performance. If you are involved in a dispute over a mandatory arbitration clause, you should contact an attorney for legal advice. A contracts lawyer would be able to help you interpret the arbitration clause and determine whether it is enforceable in your particular situation. 

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Last Modified: 08-09-2011 03:28 PM PDT

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