What is an Arbitration Agreement?

The ins and outs of contractual agreements to engage in arbitration.

By — on / Conflict Resolution

arbitration agreement

If you have ever owned a cell phone or been issued a credit card, odds are you’ve signed an arbitration agreement. You also may have signed an arbitration agreement when you started your current job or a past one, whether you remember doing so or not. In 2010, 27% of U.S. employers reported that they required their employees—an estimated 36 million people—to sign arbitration agreements, according to the National Employment Lawyers Association.

Claim your FREE copy: The New Conflict Management

In our FREE special report from the Program on Negotiation at Harvard Law School - The New Conflict Management: Effective Conflict Resolution Strategies to Avoid Litigation – renowned negotiation experts uncover unconventional approaches to conflict management that can turn adversaries into partners.

What is an arbitration agreement? It’s typically a clause in a broader contract in which you agree to settle out of court, through arbitration cases, any dispute that arises with your counterpart. Arbitration agreements are common in consumer contracts and employment contracts, but they can be proposed additions to any contract negotiation in which one or both parties would like to head off the possibility of a future lawsuit.

To reduce the costs and improve the efficiency of dispute resolution, businesses often require that their customers and employees to sign an arbitration agreement. Unfortunately, however, because arbitration clauses often appear as “fine print” in lengthy standard contracts, people often sign arbitration agreements without realizing that they are doing so.

What is arbitration?

In arbitration, a trained, professional, and neutral arbitrator acts as a judge who will render a decision to end your dispute. Arbitrators are often retired judges, but that doesn’t mean they follow traditional legal procedures to the letter. Arbitration is actually a highly flexible process whose ground rules are open to negotiation (for more on the differences between arbitration and mediation, read also Undecided on Your Dispute Resolution Process? Combine Mediation and Arbitration, Known as Med-Arb).

Arbitration guidelines tend to be the following, write Sarah Rudolph Cole and Kristen M. Blankley in their chapter, “Arbitration,” in The Handbook of Dispute Resolution (Jossey-Bass, 2005). Together, the parties choose an arbitrator from a list provided by an arbitration firm. The arbitration is held in a private conference room rather than a public courtroom. The arbitrator begins by presenting the ground rules; then each party makes an opening statement, or their lawyers do. Next, each party presents its evidence and, if necessary, brings in witnesses to support its claims. During this time, the arbitrator may ask questions to clarify her understanding of the issues (for more on the pros and cons of arbitration versus mediation as a dispute resolution procedure, see also Mediation and the Conflict Resolution Process).

Finally, the parties deliver closing statements and, in some cases, submit post-hearing briefs that summarize their arguments. Then, within the parties’ deadline, the arbitrator issues a written decision or award, sometimes with an opinion attached. Unlike in litigation, the arbitrator’s decision usually cannot be appealed.

Benefits of arbitration

As compared to a lawsuit, arbitration is relatively inexpensive, brief, and confidential. The courts usually refuse to overturn arbitrated decisions and can step in to make sure they are enforced. This means that arbitrations lead to final outcomes that allow parties to move forward, while also avoiding the public scrutiny that can accompany a court trial.

In addition, arbitration allows for more creative rulings than civil courts can issue. If you sue your former employer for wrongful termination, for example, the court can award you only monetary damages, according to Cole and Blankley. By contrast, in addition to (or instead of) awarding damages, an arbitrator could order the company to reinstate you.

Should you sign an arbitration agreement?

Employers often include mandatory-arbitration clauses in their employment contracts, as do many companies that conduct business with consumers. In arbitration lingo, repeat players are parties that frequently participate in arbitrations to avoid lawsuits, according to Cole and Blankley. By contrast, one-shot players, often individual consumers, have little experience with arbitration.

One-shot players in consumer contract disputes are often at a disadvantage in arbitration, as they may lack the experience and resources necessary to mount a strong case. If you got into a dispute with your cell-phone company over a late payment, for example, you might well be the underdog in any arbitration that followed.

Consumer advocates have fought the corporate practice of requiring consumers to sign arbitration agreements on the grounds that consumers usually aren’t aware they’ve waived their litigation rights and because arbitration decisions routinely favor companies over consumers (for more information on disputes routinely resolved through arbitration-mediation, see also Employee Grievances: Are Most Legal Disputes Resolved in Litigation or Arbitration?). In an examination of 19,000 California mandatory-arbitration cases handled in 2003 by arbitrators appointed by the for-profit National Arbitration Forum (NAF), the nonprofit watchdog group Public Citizen found that companies prevailed over consumers in a whopping 94% of the disputes.

By contrast, arbitrations between organizations that both have strong resources tend to be more balanced, as in the case of a company and a labor union that are trying to resolve a collective-bargaining agreement or two companies arguing over a possible patent infringement.

Should you sign an arbitration agreement? If you agree to engage in a possible future arbitration voluntarily, mutually determine the ground rules of arbitration and agree to choose an impartial arbitrator together, you are likely to find arbitration to be not only inexpensive and fast but also fair. By contrast, if you feel you’re being pressured into signing an arbitration agreement, consult with a lawyer and discuss your options and possible future scenarios.

What do you think about arbitration agreements? Leave a comment.

Related Article: What is Dispute Resolution in Law: The Ins and Outs of Arbitration

For more information on the three basic types of conflict management, see also: What are the Three Basic Types of Dispute Resolution? What to Know About Mediation, Arbitration, and Litigation

Claim your FREE copy: The New Conflict Management

In our FREE special report from the Program on Negotiation at Harvard Law School - The New Conflict Management: Effective Conflict Resolution Strategies to Avoid Litigation – renowned negotiation experts uncover unconventional approaches to conflict management that can turn adversaries into partners.

The Program on Negotiation at Harvard Law School
501 Pound Hall
1563 Massachusetts Avenue
Cambridge, Massachusetts 02138

tel 1-800-391-8629
tel (if calling from outside the U.S.) +1-301-528-2676
fax 617-495-7818