Mandatory Arbitration Clauses in Business Agreements

Mandatory Arbitration Clauses in Small Business Agreements

••• David Gordon/Flickr Creative Commons

Arbitration clauses in business and consumer contracts have been growing in recent years. Over the past few years, many online companies have instituted mandatory arbitration clauses in user contracts.  

In some cases, consumers are not aware of the mandatory arbitration clauses, because they are in fine print within a user agreement, or the user must agree within a short time after initiating the service (in the case of Dropbox).


Arbitration clauses have been popping up in doctor's agreements and employment agreements, too.

But consumers have been fighting back. In 2012, Starbucks customers petitioned the company to remove forced arbitration from its gift card terms of service, and more recently General Mills abandoned a forced arbitration clause for online customers who wanted to enter sweepstakes or use coupons, after a backlash by consumers on Facebook.

Recent Decisions Affecting Arbitration Clauses

Recent Supreme Court cases (like an American Express case in 2013) have upheld the right of companies to institute mandatory binding arbitration clauses in agreements with other companies or consumers.

Most recently, in May 2018, the Supreme Court ruled that companies can use arbitration clauses to prevent employees from filing class action suits against employers for employment issues. 

What is Arbitration?

Arbitration is a form of alternative dispute resolution, in which a disinterested third party listens to both sides of a dispute and makes a - usually binding - decision. The arbitration process is used as an alternative to lengthy and binding lawsuits.

(Mediation, another form of alternative dispute resolution, involves both parties in a discussion of an issue with a trained mediator who helps the parties come to an agreement. Mediation is usually not binding.)

Benefits of arbitration include:

  • As mentioned above, savings of time and money instead of litigation.
  • The parties have more control over the arbitrator and may be able to find someone trained in the area under dispute (employment agreements, for example).
  • The lack of formal preliminary legal work (discovery, depositions, etc.) can mean significant savings.
  • In theory, the services of an attorney are not required, resulting in more savings for both parties.

Drawbacks of arbitration include:

  • The lack of formal evidence or discovery of facts. No testimony is taken (depositions or interrogatories),
  • There is usually no appeal from the decision of an arbitration, as there is in lawsuits. The decision is binding on both parties.
  • Typically companies have inserted arbitration clauses in employment contracts which heavily favor the company over the employee. 

Concerns about Forced Arbitration Clauses in Consumer Contracts

  • The consumer is forced to agree to the arbitration clause, contrary to the original purpose of mutually agreed upon arbitration.
  • Consumers agreeing to a forced arbitration clause must give up their right to sue, to file a class action suit, or to appeal the decision of the arbitrator.
  • As mentioned above, consumers are often not aware of the existence of an arbitration clause in a contract or terms of an agreement.
  • The company selects and hires the arbitrator, so the arbitrator is essentially working for the company.
  • The consumer has no control over the time and place of the arbitration.
  • Depending on how the arbitration clause is worded, the company may have the option to sue the customer, but not vice versa.
  • Because awards are less, a consumer who wants to be represented by an attorney may have to pay the attorney on an hourly basis instead of on a retainer.
  • Arbitration results in lower damages to consumers than lawsuits. Public Citizen has noted:
Comparisons of average awards by arbitrators and courts in employment cases and medical malpractice cases show that arbitration claimants receive only about 20 percent of the damages that they would have received in court.

Consumers can opt out of these arbitration agreements, but the company can refuse service if the customer does not agree to arbitration.

Over the past few years, Congress has attempted legislation to make the arbitration process more even for consumers and employees. Several versions of an Arbitration Fairness Act have been submitted to Congress, but so far none have been enacted. A 2013 version, for example, "[d]eclares that no pre-dispute arbitration agreement shall be valid or enforceable if it requires arbitration of an employment, consumer, antitrust, or civil rights dispute."