Mandatory arbitration: Overview, definition, and example
What is mandatory arbitration?
Mandatory arbitration is a contract provision that requires disputes between the parties to be resolved through arbitration rather than through a lawsuit in court. Arbitration is a private legal process where a neutral third party (the arbitrator) makes a binding decision on the dispute.
For example, if an employee signs an employment contract with a mandatory arbitration clause, they must resolve any workplace disputes through arbitration instead of filing a lawsuit against the employer.
Why is mandatory arbitration important?
Mandatory arbitration helps businesses resolve disputes more efficiently and cost-effectively than going to court. It typically involves less time, lower legal fees, and more privacy than a public lawsuit.
For SMBs, arbitration can help avoid lengthy and expensive litigation. However, mandatory arbitration can also limit an employee’s or customer’s legal options, which may lead to concerns about fairness. Businesses must ensure arbitration clauses are enforceable and clearly communicated.
Understanding mandatory arbitration through an example
A small business enters into a service agreement with a vendor, which includes a mandatory arbitration clause. Later, a disagreement arises over payment terms. Instead of going to court, both parties must resolve the issue through arbitration, where an independent arbitrator decides the outcome.
In another example, an online subscription service includes a mandatory arbitration clause in its terms of service. If a customer has a billing dispute, they cannot file a class-action lawsuit but must go through arbitration instead, as required by the agreement.
An example of a mandatory arbitration clause
Here’s how a mandatory arbitration clause might appear in a contract:
“Any dispute, claim, or controversy arising out of or relating to this Agreement shall be resolved exclusively through binding arbitration in accordance with the rules of [Arbitration Provider]. The decision of the arbitrator shall be final and enforceable in any court of competent jurisdiction.”
Conclusion
Mandatory arbitration clauses require disputes to be settled through arbitration rather than the court system. They can save time and costs for businesses but may also limit legal options for employees or customers.
For SMBs, using mandatory arbitration clauses can help resolve disputes efficiently, but businesses should ensure the clause is fair, enforceable, and appropriate for their industry and relationships.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.