In California, a binding arbitration clause is a method of alternative dispute resolution that occurs outside of court. This type of clause is found in a contract between two parties; should a dispute arise, it is designed to keep the parties out of court and does not allow either to file a lawsuit. Typically, the dispute is settled by a neutral third party, which is then enforceable in court.

Why is a Binding Arbitration Clause Needed?

In addition from preventing a lawsuit, there are a few other reasons why someone or a company would use a binding arbitration clause:

  • Avoids hostility: Both parties are encouraged to work together towards a resolution.
  • Less expensive: Typically cheaper than litigation, though the cost is continually rising
  • Quicker than litigation: Time spent in arbitration is considerably less than in court.
  • Flexible: Can be scheduled to accommodate everyone’s availability, rather than fitted into a court’s calendar.
  • Simplified proceedings: Rules of evidence and procedure that apply in litigation are not applicable in arbitration proceedings.
  • Private: Proceedings are usually held behind closed doors, and parties may even agree to keep them confidential.

What Would Make the Clause Fail?

As with other contracts, there are some instances where a binding arbitration clause may be void in California. It cannot contain certain “unwaivable” rights or have any of these criteria:

  • Fraud in the inception: You did not know what you were signing, nor intended to enter the contract that contained an arbitration clause.
  • Fraud in the inducement: You knew what you were signing, but the other party misled you into entering the contract that contained an arbitration clause by fraud.
  • Duress: You signed the contract through coercion.
  • Illegal agreement: The purpose of the contract is illegal, such as waiving minimum wage requirements.
  • Unconscionable: The contract is unreasonably favorable to one party.

What is the First Step If You Want to Challenge the Clause?

If you are seeking to challenge an arbitration clause, it is a good idea to speak with an attorney. An attorney will be able to determine if your case meets any of the aforementioned criteria, and can then petition the court on your behalf. If the judge determines that the contract contained unwaivable rights, or the above criteria, they may void the contract.

In very limited cases, you may be able to appeal an arbitration award in court. If the court hears it (which, it may not), the award will either be enforced or vacated. Review of an arbitration award is based on the Federal Arbitration Act (FAA) guidelines and public policy. If the contract is unconscionable, fraudulent, made under duress, or against public policy, the award will be vacated. Most cases rarely meet the requirements, so few are brought to court.

How Can a Lawyer Help Me?

If you have entered a binding arbitration clause in California, and are seeking relief, contact a California business attorney immediately. A lawyer can help you decide your best course of action, gather evidence in support of your case, and represent your best interests in moving forward. Contracts can be complex matters, and having an attorney who is experienced in contract law is an invaluable asset in the protection of your rights.