Arbitration Clauses in Contracts: What They Mean for You

What Is an Arbitration Clause?

An arbitration clause requires the parties to resolve disputes through a private arbitrator rather than in court. Instead of filing a lawsuit and going before a judge or jury, you present your case to a neutral third party who makes a binding decision.

How Arbitration Works

When a dispute arises under a contract with an arbitration clause:

• One party files a claim with an arbitration organization (commonly the American Arbitration Association or JAMS)
• An arbitrator is selected, often from a panel
• Both sides present evidence and arguments in a less formal setting than court
• The arbitrator issues a decision, which is typically final and binding
• Court review of arbitration decisions is extremely limited

What You Give Up

By agreeing to arbitration, you typically give up:

• Right to a jury trial: Your case is decided by one or more arbitrators, not a jury of your peers
• Right to appeal: Arbitration decisions are very difficult to overturn in court
• Class action rights: Many arbitration clauses include class action waivers, meaning you cannot join with others in a group lawsuit
• Public proceedings: Arbitration is private, which means there is no public record

When Arbitration May Benefit You

• Disputes can be resolved faster than court litigation
• The process is typically less formal and may cost less in legal fees
• You may be able to select an arbitrator with relevant industry expertise
• Confidentiality can protect sensitive business information

Red Flags in Arbitration Clauses

• The clause requires arbitration in a distant location, making it impractical for you to participate
• One party gets to select the arbitrator unilaterally
• The clause requires you to pay a disproportionate share of arbitration costs
• Class action waiver combined with small individual claim amounts (making it uneconomical to bring any claim)

When to Consult a Lawyer

Consider consulting an attorney if you are signing a contract with an arbitration clause that involves significant financial commitments, employment rights, or consumer protections. Understanding what you are waiving is essential before agreeing.

This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.