If you’ve read through a contract lately, you may have noticed language that states, “Any claims arising out of this contract shall be settled by arbitration.” You may wonder what this provision means and what advantages or disadvantages it offers.
An arbitration clause in a contract is essentially an agreement to resolve any disputes through arbitration; that is, through submitting disputes to a panel or single arbitrator for mediation. The arbitrator or panel will listen to witnesses and review evidence, just as in litigation. While arbitration looks like litigation in some respects, it may be less costly and time-consuming, and it may proceed more quickly and smoothly since it doesn’t depend on a court docket. Arbitration also may involve more input from the parties since the parties can choose their own arbitrator from a pool of potential candidates rather than relying on the luck of the draw. Also, unlike judges, arbitrators may be experts in the subject of the contract. Further, arbitration is not as openly adversarial as litigation.
However, arbitration comes with its own costs. The decision of the arbitrator is final, and you will have no recourse to a judge and jury if you are dissatisfied with the outcome. Arbitration isn’t bound by the same procedural rules as litigation, and the lack of structure may make it difficult to get the information you need or to ensure that the other party behaves fairly. Further, arbitration clauses often represent a significant imbalance of power: Many common agreements, such as cell phone contracts and credit card contracts, include mandatory arbitration clauses, pitting individual consumers against large, multinational corporations. In addition, arbitration clauses often prohibit class actions, which means that individual consumers cannot band together to oppose actions by those large corporations—a significant loss when the dollar amounts at issue in individual cases may not be enough to warrant individual litigation. Even with these considerations, arbitration is increasingly common—which means that you should read contracts with care and decide if arbitration’s benefits outweigh its costs.
Kathleen Davies is a staff writer for GetLegal.com. She is a graduate of the University of Michigan Law School and has practiced law and taught legal writing and advocacy.
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Resources for further research on Arbitration, Mediation and Negotiation