A mandatory arbitration clause is a provision in some contracts regarding how disagreements will be settled. Mandatory arbitration clauses usually declare that the parties will not litigate their legal problems if a dispute occurs over the contract, such as a breach of contract or business dispute. Instead, the parties agree to arbitration to resolve the dispute.

The word “mandatory” means required. If the parties consent to a mandatory arbitration clause, they will be required to settle matters through arbitration, as they have effectively forfeited their litigation rights.

An example of language generally contained in a mandatory arbitration clause is:

“All disputes or conflicts arising out of the present contract shall be settled according to arbitration rules.”

What Is Arbitration?

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

Arbitration can be a promising alternative in many instances because it tends to save time and money compared with a formal lawsuit. Yet, arbitration can harshly restrict 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 formed the arbitration clause.

When Are Mandatory Arbitration Clauses Used?

Mandatory arbitration clauses can be found in a variety of different contracts. Any contract can include 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
  • Car purchases
  • Miscellaneous agreements, such as credit card, rental, and cell phone agreements

Usually, one side will present the arbitration clause, and the other will consent to it. Sometimes, the arbitration clause will be buried in fine print at the back of the contract, so check any agreement thoroughly before signing it.

Which Laws Cover Mandatory Arbitration Clauses?

The primary law governing arbitration clauses is the Federal Arbitration Act. The Act regulates the enforceability of arbitration clauses in a contract. It states that such clauses will be implemented in any contract involving transactions across state boundaries or where the transaction deals with maritime laws. Therefore, the Federal Arbitration Act creates a solid policy to enforce mandatory arbitration clauses.

If the Federal Arbitration Act is not applicable, state laws will control the use of the mandatory arbitration clause. These may differ widely from state to state. Some states contain laws that are incredibly different from those of other states. For instance, California permits parties to set aside an arbitration clause if the contract is not proper or if the parties consent to take out the clause. On the other hand, the state of New York bans mandatory arbitration clauses altogether in consumer contracts.

What Is Arbitration?

As companies continue to grow their territories, many companies turn to arbitration to resolve disputes. An arbitration agreement is a clause in a contract that requires the parties to settle disputes through arbitration rather than litigation.

Arbitration is a type of alternative dispute resolution (ADR). Arbitration is less formal than court-based legal proceedings and relies on private adjudication by an impartial third party known as an arbitrator. The decision by the arbitrator is known as an “award.”

The objective of arbitration clauses is to provide efficient, honest, and reasonable conflict resolution while promoting out-of-court settlements and reducing the burden on the court system. Additionally, arbitration is confidential, unlike litigation, which is public.

Arbitration is normally a definitive, legally binding process that may affect your rights. It’s crucial to remember that the arbitrator does not supply legal advice or aid in your conflict. Although it is not required, parties can confer with an attorney before and during an arbitration hearing.

Arbitration clauses are often implemented according to contract law precepts. Nevertheless, some jurisdictions hold them unenforceable if there has been any deception, overreaching, or the absence of mutuality with terms such as “any,” “all,” or “every” (as opposed to “some”) in the arbitration clause.

Is the Arbitration Clause In My Contract Enforceable?

The United States Arbitration Act, more generally referred to as the Federal Arbitration Act or FAA, was enacted to ensure federal policy favoring arbitration arrangements.

This federal act delineates when and where such agreements can be implemented – e.g., disputes between companies. Yet, most states have their own rules concerning individual contracts overseeing whether an arbitration agreement is valid or enforceable.

Most state laws mandate that both parties agree to arbitrate any future conflicts emerging out of the contract for the agreement to be valid. Even if both parties sign a contract with an arbitration clause, they generally cannot be forced to if one party does not want to fix future issues through arbitration.

Some states only require “consideration” for an arbitration clause to be held binding, while others demand that consideration not be provided until later in the contract or at all. If consideration is not explicitly mentioned, the arbitration clause will likely still be deemed valid by a court unless it can be established that one party was somehow compelled into signing it.

For individual arbitration clauses to stay binding throughout the contract’s existence, the law directs them to last longer than any grievance arising during its duration.

If you file a breach of contract suit against someone, but they have an arbitration provision in their contract with you, the law would demand that you settle your conflict through arbitration first before bringing suit.

The regulation governing arbitrations also supplies a waiver of an arbitration clause, but some courts will not enforce such waivers except under extreme circumstances.

For federal workers and those operating in federal facilities, such as a US Post Office, federal regulations mandate that all conflicts be resolved through binding arbitration instead of the federal court system. Such restrictions do not apply to private citizens, and state requirements still apply.

Under the arbitration regulations, if each party agrees that the final arbitration award can be entered as a judgment in any federal or state court with original jurisdiction, then that filed arbitration award will allow that court to enforce the arbiter’s decision.

After an arbitration award has been filed, the parties must accept the arbitrator’s decision and abide by their judgment.

What Is the Arbitration Fairness Act of 2009?

The Arbitration Fairness Act of 2009 was a significant bill and could have substantial consequences on contracts and mandatory arbitration clauses.

The Arbitration Fairness Act would restrict businesses and companies from pushing mandatory arbitration upon consumers. It would make arbitration voluntary rather than compulsory. Therefore, the Arbitration Fairness Act would directly counter the current policy of enforcing mandatory arbitration.

However, Congress never enacted the Act, and it was never legislated.

Do I Need a Lawyer for Mandatory Arbitration Clause Disputes?

As with any contract problem, debates over mandatory arbitration clauses are serious and could impact the overall outcome of contract performance. If you are involved in a controversy over a mandatory arbitration clause, you should contact an attorney for legal guidance.

A contract lawyer would be able to help you interpret the arbitration clause and decide whether it is enforceable in your particular situation.