Before discussing the specifics of a binding arbitration clause in California, it may be helpful to first understand what an arbitration is generally. Arbitration is a private process that parties use to resolve legal conflicts or disputes.
A third party, known as an “arbitrator”, listens to both sides of the dispute and then makes a decision based on what they heard from the parties. When the arbitrator reaches a decision, they issue an arbitration award. This whole process is said to be either binding or non-binding.
A binding arbitration means that the decision reached at the end of the arbitration process is final. The parties are bound by the decision and the final results are enforceable by law. For this reason, binding arbitrations are difficult to challenge.
Binding arbitrations are typically used to resolve civil contract disputes, such as those that arise with business transactions or employment contracts.
A binding arbitration clause is a type of clause that may be found in a contract made between two or more parties. The clause is meant to prevent the contracting parties from filing a lawsuit in court, should any future disputes occur. Instead, parties who sign a contract with this clause must agree to resolve disputes by binding arbitration.
As discussed above, binding arbitration decisions are final, enforceable by law, and difficult to challenge.
In addition to safeguarding against future lawsuits, a binding arbitration clause provides several other advantages, including:
- Cost: Going to court is an expensive process. Since arbitrations occur outside of a courtroom, they are usually less expensive.
- Time: Part of the reason arbitrations are less expensive is because they take less time to resolve than a court case.
- Flexible Scheduling: Another issue tied-in with time is scheduling. In a lawsuit, the parties are scheduled according to a court’s calendar.
- In an arbitration, however, the schedules are more flexible because there is no court calendar to abide by and it is meant to directly accommodate only those parties involved.
- Simple: Arbitration procedures are less formal and less technical than courtroom proceedings. This is also another reason why arbitrations save parties time.
- Neutral: Court cases increase hostility by separating the parties and forcing them to argue against each other until someone wins.
- Arbitration, on the other hand, means that the parties are working together to reach a compromise. This strategy is much more likely to result in the parties maintaining an amicable business relationship after the arbitration ends.
- Private: Arbitrations are normally private proceedings. Parties may even agree to keep the proceedings confidential. Court cases are much more public. Unless a judge orders a case to be sealed, anyone can watch proceedings and anyone can access the main case files because they are public record.
As with most contracts, there are certain circumstances that may cause a binding arbitration clause to become void in California. For instance, if a contract is formed that goes against public policy, then the entire contract will be considered void. The following are some other examples that may cause a binding arbitration clause to fail:
- Fraud in the Factum: This is a type of fraud that occurs when a person enters into a contract and they do not understand the consequences of its contents. The person might not know the true risks or obligations that they agreed to when they signed it.
- Fraud in the Inducement: This is a type of fraud that occurs where the person understands that they are entering into a contract, but the other party misleads them about the facts contained in the contract, and the person signed it based on those facts.
- Made Under Duress: This is when a person threatens or coerces a party into signing a contract.
- Illegal Contract: This is a contract that was created using illegal terms. For instance, you cannot contract with another party to sell drugs because it is against the law to do so.
- Unconscionable Contract: A contract may be found unconscionable for a variety of reasons. Unconscionable simply means that a contract is not right or reasonable to a shocking degree.
- One example is when parties enter into a contract that gives one of the parties much more power than the other, making the agreement extremely unfair for the party with less power.
If you have entered into a contract with a binding arbitration clause and believe that you might have a claim, your first step should be to contact an attorney. An attorney will be able to not only guide you through the process, but also can check if your claim meets any of the requirements for the issues mentioned in the above section.
Additionally, if you are located out of state, but your claim requires you to appear in California, an attorney can petition a court on your behalf. After the attorney petitions the court, a judge may find that the contract contains fraudulent content or is unconscionable, and they may void the contract.
In very limited situations, you may be able to appeal a binding arbitration award in court. If the court decides to hear the appeal, the judge will rule whether the award should 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 may be vacated. Although most cases rarely meet the requirements, it may still help to contact an attorney to see what options are available.
If you are located in California and are seeking relief from entering into a contract with a binding arbitration clause, contact a California business attorney immediately. An attorney can help you to determine the best course of action, gather evidence for you that supports your case, and can represent your best interests moving forward.
Contract disputes are complex matters, but by hiring an attorney who has experience in contract law, you will gain an invaluable asset; one that can ensure the protection of your rights.