What is an arbitration agreement?
As a leading civil defense attorney in Orange County, I get asked this question a lot.
An arbitration agreement is a written contract in which two or more parties agree to utilize a neutral third party- the arbitrator- to resolve a dispute instead of pursuing any legal claims against the other party through a lawsuit. The arbitration agreement is usually a clause in a more extensive contract, but may also be a separate document required to be signed by an employee in the hiring process when starting a new job.
Arbitration can be voluntary, but in most cases is mandatory when present as a stipulation of a consumer contract or when completing new hire paperwork as an employee. Mandatory arbitration can only come from a contract that is voluntarily entered into by both parties, even without necessarily knowing if a disagreement will ever actually arise. The dispute may be about a faulty product, a claim of discrimination or wrongful termination in the workplace, or a variety of other issues.
Presently many consumer contracts for cars, cell phones, credit cards and nearly everything else contain a fine-print clause stating if the customer has a problem with the company, the matter will be handled in arbitration rather than in court. Unfortunately, consumers and employees often don’t know in advance that they have agreed to mandatory binding arbitration by purchasing a product or taking a job. Many retailers also fail to mention the arbitration clause before requiring the customer to sign the purchase agreement.
The Disadvantages of Arbitration Agreements
Being aware of the possible drawbacks of arbitration can help you make an informed decision about whether to enter or remain in a contract that mandates it, or whether to choose it as a resolution technique if a dispute does occur at a later time.
- Firstly, arbitration does away with juries entirely, leaving matters solely in the hands of the arbitrator, who essentially acts as both judge and jury. From most individuals’ and consumers’ points of view, having a jury of their peers is an important right when seeking restitution of a claim.
- Additionally, arbitration limits the amount of information each side is required to give to the other. In most employment cases, this generally hurts the employee, because the employer is usually the one in possession of most of the documentation relating to the employee’s case.
- Most importantly, arbitration decisions usually cannot be appealed. If the arbitration is mandatory and binding, the parties waive their rights to use the court system and have a judge or jury decide the case. If the arbitrator’s award is unfair or illogical, a consumer may well be stuck with it without a chance for recourse.
Leveling the Playing Field—Smart Steps for Consumers and Employees
Given the possible perils for those who enter into arbitration contracts, the astute consumer or job applicant can take a number of steps to become better informed and possibly prevent a negative experience.
Any civil defense attorney in Orange County will tell you to read any and all documents presented in a contract carefully! When you sign a contract, letter, sales agreement or any other document you agree to all the terms enclosed, even those that you didn’t read or don’t completely understand. To protect yourself from unwittingly giving up your rights, don’t sign any document acknowledging you’ve read something and agree to the terms unless you actually have read it and understood it completely.
Secondly, pay close attention to any and all changes made to an existing agreement. If a company updates the terms of a contract to include mandatory arbitration, it must notify you in writing first. Some of these notices may come hidden at the back of an envelope itemizing your bill from a credit card or insurance company. Resist the urge to recycle these notices on sight, and read the fine print.
Thirdly, don’t be afraid to speak up! If you find an arbitration clause objectionable for any reason, make your feelings known to company management. There may be a possibility to negotiate if the company wants your business, or you as an employee badly enough. Especially in employment cases, you may have more power than you realize to negotiate the terms of an agreement to align with your best interests, just like you would when discussing your salary or benefit requirements. Ask for a clause that provides options for choice of arbitrator and a requirement that if the company does insist upon enforcing an arbitration agreement that they pay for the process, should the situation ever arise. An arbitration agreement that is disputed using the court’s judicial arbitration services is only $150, but if a company insists on using a private arbitrator the parties will be required to pay the arbitrator’s market rate, which can easily turn into thousands of dollars as time goes on.
Arbitration can be dangerous and expensive. Be watchful for it and careful before agreeing to it.
Mediation, on the other hand is another matter and I will discuss that issue (and its benefits) in a separate blog.
Lastly, always remember that even if you do fall within an arbitration clause, you still have the right to be represented by an attorney throughout the arbitration process.
Paymon Bidari is a civil litigation attorney in Fullerton, Orange County.