Many contracts contain contractual arbitration clauses. The language obligates the parties to the contract to resolve any disagreements through the binding arbitration forum, possibly, if specified, through the parameters set by the American Arbitration Association (AAA). The arbitration clause’s effect is to avoid the court system. The intention is for the parties to resolve disputes more quickly and efficiently, and to save costs. A party to a contract that refuses to resolve the dispute through binding arbitration may be compelled by a court to honor the contractual arbitration agreement, while the party that is forced to obtain a court order commanding the arbitration may seek, from the court, reimbursement for all attorneys’ fees and costs incurred in securing the arbitration order.
Unfortunately, the binding arbitration clause contains several detrimental effects. Through avoiding the court system, the parties forfeit their constitutional right to a jury trial. The binding arbitration shall be decided by a single arbitrator, agreed upon by the parties. If the parties cannot agree, each one usually selects an arbitrator, who reach an agreement for a third arbitrator to handle the proceedings. Other than losing the right to a jury, the parties usually also forfeit any right of appeal. In other words, the arbitrator’s judgment is final and cannot be reviewed.
By agreeing to avoid the court system, the parties also cannot take advantage of the Code of Civil Procedure, meaning their ability to discover facts and evidence in support of the opposing party’s case is usually limited, although a motion can be brought before the arbitrator to allow further discovery.
Finally, the binding arbitration session does not usually secure much in cost savings. The administration and arbitrator fees may mirror litigation costs through trial, for a civil matter filed in state court, encompassing thousands of dollars.
Although the binding arbitration will secure resolution far more quickly than a civil action, the parties give up a plethora of rights and do not necessarily conserve much in expense. Serious consideration should be given to execution of a binding arbitration clause within a contract.